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The Great Recession and Developing Countries
studied.19 In all cases financial systems were quite sound and experienced little direct impact from the crisis. Nonetheless, loan portfolios of banks may need to be watched in the coming period for two reasons. First, during the boom, consumer credit expanded in almost all countries (except Ethiopia). The impact of the crisis could undermine the quality of these loans. Second, policy responses included large increases in liquidity by central banks and, in some cases, the adoption of aggressive credit policies. For example, in Brazil, China, and Vietnam, government policy directed banks and state-owned enterprises to boost lending to infrastructure projects and to maintain some industries that were not performing. Some of this lending may affect the quality of banks’ portfolios. Third, higher unemployment during the crisis may discourage workers from seeking jobs, especially if it translates into prolonged spells of unemployment. This could, in turn, erode marketable skills and destroy human capital. But based on our sample of countries, such concerns do not seem to be highly relevant and are unlikely to have played an important role in the current crisis. The Turkey case study reported a sizable increase in unemployment during the crisis, but a major cause was an increase in labor force participation as workers, especially women, were seeking work opportunities in the face of falling incomes. Fourth, the crisis may lead to slower accumulation of human capital in developing countries due to lower social spending on health and education. Evidence on this impact is scanty, but the limited data available for a number of countries show that the effect of the crisis on public and private spending on health and education has varied considerably. In general, governments and households tend to protect education over health. Low-income countries are more likely to cut spending on health and education, while middle-income countries tend to increase spending on health and education even when the share in total expenditures is reduced. Many countries have expanded safety nets and protected social spending during the crisis (Lewis and Verhoeven 2010). Thus, this channel of impact seems limited in the case of our sample countries, although further evidence is required. Finally, the use of fiscal stimulus spending to invest in infrastructure or skills may relieve binding constraints to growth in a country. The large stimulus packages in China and Vietnam were mostly directed