The Growth Commission has published a report (Post-Crisis Growth in Developing Countries) assessing the financial meltdown and its own fallout on economic development in the developing countries. I was planning to read it last month but couldn’t do this. This statement assesses if the prior recommendations in The Growth Report still is true following the 2008 financial crisis.
The conclusion is that the recommendations remain relevant however, much restraint on capital controls and financial liberalization might be successful. The report stresses the crisis does not show the failure of market-based system but that of the financial sector. The outward-looking strategy is still relevant, but it may not be as rewarding as it was before the turmoil because of slower growth in trade, costlier capital, and a more inhibited American consumer. Are records from the record Below? Fully exploited the world economy; imported ideas, technology, and knowhow; produced goods that meeting global demand, customized and expanded without saturating the marketplace quickly. Maintained macroeconomic stability; inflation under control and lasting fiscal paths.
High rates of investment (25% of GDP), including public investment, financed by similarly impressive rates of local cost savings. Strong, committed, capable, and credible governments; their macroeconomic strategies and macroeconomic regulations provided the setting where market dynamics could work; provided a range of open public goods such as infant and schooling diet that market segments under-provide. What did the crisis teach us?
The crisis delegitimized an influential school of thought, which held that lots of financial marketplaces could be left with their own devices, because the self-interest of participant would limit the risks they took. At a huge cost, it taught an unforgettable lesson about how exactly financial systems really work. But, the crisis is failing of the financial system, not the marketplace per se. Prior, to the crisis (September 2008), developing countries confronted very high-item charges for eighteen months, peaking in the summer and springtime of 2008. When the crisis erupted, there were declines in investment, trade, and employment.
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The turmoil spread to the developing countries through financial channel (credit tightened almost everywhere) and real economy channel (trade collapsed more than economic activity). China was less susceptible to mobile investment money due to its capital controls. China’s response to the crisis was a do it again of its response to the Asian financial crisis in 1997-98, but on a much larger size. The government must prevent a whole failure of the financial system and replace essential functions like credit provision until the normal stations reappear. It will also prop up economic activity and asset prices by filling the gap remaining by sidelined consumers and traders.
Moreover, it must act as a “circuit-breaker”, interrupting the transmitting of shocks in one area of the overall economy to the other. Fiscal stimulus reduces declines in the true economy, boosting work, credit, and income quality. The US consumer can be the US saver in an effort to repair the harm to household balance sheets.