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The Great Recession and Developing Countries
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In response to the crisis and its potentially devastating consequences, policy makers used instruments that were readily available to them, which made for a large variety of policy measures used across countries. Countries like Brazil, China, India, and Vietnam used stateowned banks to channel credit to the productive sector. Others used various tax incentives to support domestic demand, and even incentives to households to buy consumer goods. This makes it difficult to undertake comparative analysis of the effectiveness of policies across countries. The policy responses in most countries were timely, strong, and sensitive to macroeconomic realities. Brazil, China, India, and Vietnam put in place fairly strong stimulus packages; those of Mexico and Turkey were less ambitious. Central banks fought back with aggressive monetary policy via increased liquidity and low interest rates. Unlike in prior crises, the exchange rate was not a major issue, as countries pursued exchange rate policies that allowed for flexibility to protect reserves. Much of the currency depreciation occurred at the onset of the crisis, which facilitated a faster adjustment. There is little evidence of negative impact on human capital accumulation and no information about possible positive effects of increased investments in infrastructure during the crisis on potential growth in the medium term. However, these issues require further analysis.
Medium-Term Growth Prospects We have discussed how the immediate and (very) short-term losses in output from the financial crisis were substantial, and even severe, for many countries. In the short term and during the recovery phase, growth rates will depend on specific country dynamics, which may imply an actual output growth rate that is below or above potential output growth. On the other hand, the impact of the current crisis on economic growth will dissipate over the long run, and the standard determinants of growth in both advanced and developing countries will again be the countries’ stock of knowledge and technology, the potential for catching up, and the institutions and policies they adopt. It is also clear that future crises and other major shocks are likely to occur and affect economic conditions and outcomes.