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The Great Recession and Developing Countries
investment and accelerated economic growth, but they have also posed problems for exchange rate and aggregate demand management at the country level. Sharp short-term outflows, in contrast, pose challenges for economic stability at the global-economy level. Nowhere have the challenges been more visible than in the United States and in other high-income economies after the collapse of the subprime mortgage market and its spread to other financial markets and countries. The crisis has been unprecedented in its origins and unique in its intensity. It originated in a high-income economy and spread rapidly to the rest of the world through financial and trade channels. The crisis led to a 6.5 percent fall in the median GDP growth rate of the Group of Seven (G7) countries between 2007 and 2009, and it has had protracted effects in several low- and middle-income economies in the rest of the world. The intensity of the crisis has also highlighted the imbalance between the depth and breadth of the problems and the inability of traditional international coordination mechanisms to contain and resolve them. Ad hoc mechanisms created to avoid disruption of the global payments system—led by the U.S. Federal Reserve, the European Central Bank, and the central banks of China, Japan, and several other countries— were effective in averting a collapse of the international payment system and a deeper global economic recession. But the experience has left many treasury and central bank officials around the world concerned that the new risks have yet to be constrained. The 10 case studies in this volume illustrate the wide range of effects of, and responses to, the global crisis in low- and middle-income economies. While the case studies do not constitute a statistically representative sample of the globe, they illustrate a broad range of experiences in the wake of the crisis and give insights into both the benefits and challenges of globalization. The use of a common methodology in preparing the cases unquestionably facilitates cross-country comparisons and helps identify areas where more study is needed to increase our understanding of the current problems of, and prospects for, developing countries.
The Crisis and Ensuing Recession As noted earlier, the subprime mortgage crisis broke out in the United States and was transmitted rapidly to other financial markets in the United