Chandan Sapkota’s Blog

The Growth Commission has published a report (Post-Crisis Growth in Developing Countries) assessing the financial meltdown and its own fallout on financial development in the developing countries. I was likely to read it last month but couldn’t do this. This record assesses if the previous recommendations in The Growth Report still holds true following the 2008 financial crisis.

The conclusion would be that the recommendations are still relevant but some restraint on capital handles and financial liberalization might be fruitful. The report emphasizes the crisis does not show the failing of a market-based system but that of the financial sector. The outward-looking strategy is still relevant, but it may not be as satisfying as it was before the problems because of slower growth in trade, costlier capital, and a more inhibited American consumer. Here are records from the survey. Fully exploited the world economy; imported ideas, technology, and knowhow; produced goods that meeting global demand, specialized and expanded without saturating the market quickly. Maintained macroeconomic stability; inflation under control and lasting fiscal pathways.

High rates of investment (25% of GDP), including public investment, financed by equally impressive rates of domestic cost savings. Strong, committed, capable, and credible governments; their macroeconomic strategies and macroeconomic regulations provided the setting where market dynamics could work; provided a variety of public goods such as baby and schooling diet that markets under-provide. What did the crisis teach us?

The crisis delegitimized an influential approach, which held that lots of financial marketplaces could be remaining with their own devices, because the self-interest of participant would limit the risks they required. At a huge cost, it taught an unforgettable lesson about how financial systems really work. But, the crisis is a failure of the economic climate, not the market per se. Prior, to the crisis (September 2008), developing countries encountered very high commodity charges for eighteen months, peaking in the summer and springtime of 2008. When the crisis erupted, there have been declines in investment, trade, and employment.

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The problems spread to the developing countries through financial channel (credit tightened all over the place) and real economy channel (trade collapsed more than economic activity). China was less vulnerable to mobile investment funds due to its capital handles. China’s response to this turmoil was a repeat of its response to the Asian financial meltdown in 1997-98, but on a much larger level. The government must prevent a whole failing of the economic climate and replace essential functions like credit provision until the normal stations reappear. It will also prop up economic activity and asset prices by filling up the gap left by sidelined consumers and investors.

Moreover, it has to become a “circuit-breaker”, interrupting the transmitting of shocks in one part of the overall economy to the other. Fiscal stimulus reduces declines in the true economy, boosting work, credit, and income quality. THE UNITED STATES consumer can be the US saver in an effort to repair the damage to household balance sheets.