Synthesis: Growth after the Global Recession in Developing Countries
Figure 2.8. Malaysia: Contributions to Growth by Sector 10 8 6 percent
4 2 0 –2 –4 –6
agriculture
manufacturing
services
mining & quarrying
c09 De
Se p09
n09 Ju
-0 9 ar M
c08 De
Se p08
n08 Ju
-0 8 ar M
De c07
Ju n07 Se p07
M ar -0 7
–8
construction
Source: Chapter 7 of this volume.
Domestic Financial Vulnerabilities. The severity of the crisis’s impact on
developing countries was the result of another major development: domestic financial-sector vulnerabilities attributable to a higher level of leverage and faster credit growth before the crisis. The case of Turkey illustrates this effect. Turkey suffered from a sharp fall in capital inflows. FDI, which had reached 3.8 percent of GDP in 2006, plunged to about 1 percent in 2009, while private investment contracted by 28 percent in the first three quarters of 2009 (on an annual basis). Net errors and omissions on the balance of payments showed inflows of more than US$14 billion in the first half of 2009, reflecting the repatriation of foreign exchange assets. A stronger banking sector in Turkey after the reforms undertaken from 2001 helped limit the negative financial contagion. However, rapid credit growth prior to the crisis led to almost a doubling of the loan-to-deposit ratio from about 45 percent in 2002 to 80 percent in 2008. When the crisis hit, domestic credit tightened sharply, especially for smaller firms, leading to the shutdown of businesses and increased unemployment (figure 2.9). The experience of many of the countries studied in this project, however, is not fully consistent with the explanation of excessive domestic financial vulnerabilities. For instance, three countries seriously hurt by the
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