Emerging Economies Were Not Particularly Hurt During the Great Recession of 2008-2009: What Are the Factors Identified That Explain the Resilience of These Economies?
Emerging Market Economies (EMEs) have become prominent on the world economic stage, accounting for a substantial fraction of global growth and rising in importance by virtually any economic criterion. In particular, EMEs now play an increasingly important role in international trade and financial flows, implying major shifts in the patterns of global linkages. These developments are likely to have wide-ranging implications for the structure of the global economy.
When the financial market turmoil had subsided, attention naturally turned to reforms to the financial sector and its supervision and regulation, motivated by a desire to avoid similar events in the future. A number of measures have been proposed or put in place to reduce the risk of financial distress. For traditional banks, there are significant increases in the amount of required capital overall, with larger increases for so-called “systemically important” institutions. Liquidity standards will for the first time formally limit the amount of banks’ maturity transformation. Regular stress testing will help both banks and regulators understand risks and will force banks to use earnings to build capital instead of paying dividends as conditions deteriorate. The Dodd-Frank Act of 2010 also created new provisions for the treatment of large financial institutions. For example, the Financial Stability Oversight Council has the authority to designate nontraditional credit intermediaries “Systemically Important Financial Institutions” (SIFIs), which subjects them to the oversight of the Federal Reserve. The act also created the Orderly Liquidation Authority (OLA), which allows the Federal Deposit Insurance Corporation to wind down certain institutions when the firm’s failure is expected to pose a great risk to the financial system. Another provision of the act requires large financial institutions to create “living wills,” which are detailed plans laying out how the institution could be resolved under US bankruptcy code without jeopardizing the rest of the financial system or requiring government support. Like the Great Depression of the 1930s and the Great Inflation of the 1970s, the financial crisis of 2008 and the ensuing recession are vital areas of study for economists and policymakers. While it may be many years before the causes and consequences of these events are fully understood, the effort to untangle them is an important opportunity for the Federal Reserve and other agencies to learn lessons that can inform future policy.
According to popular perception, emerging economies fared substantially better than advanced countries during the Great Recession. For example, studies show that advanced countries attained lower rates of GDP growth during the crisis even after taking account of the usual controls (e.g. Frankel and Saravelos 2010; Rose and Spiegel 2010). However when we look at collapses in GDP growth, the evidence suggests that, on impact, the crisis hit emerging and advanced countries equally hard. This approach has been taken by several influential studies (Blanchard et al. 2010; Claessens et al. 2010; Lane and Milesi-Ferretti 2010). In a recent paper (Didier et al. 2011), we argue that emerging countries suffered declines in real GDP growth comparable to, or even larger than, those in advanced countries. Moreover countries rebounded in the aftermath mostly according to how deep their collapse had been. In particular, we identify a non-linearity between the collapse in GDP growth and GDP per capita. The largest growth collapses tended to occur in the wealthier emerging countries and poorer high-income economies. In an important sense, this is good news. Unlike earlier crises, where emerging nations often fared much worse than developed nations, this time the shock had similar effects. Moreover, emerging nations were able to use a larger set of policy tools. There is, of course, heterogeneity among emerging nations. Eastern Europe and Central Asia fared the worst. In the case of low-income countries, their relatively lower degree of trade and financial openness helped shelter them from the worst declines in output growth.
On the whole, measuring the economic resilience of a community or region, including the actions taken to foster resilience, will vary depending on the assets and vulnerabilities of each region. Two common measures are the degree of regional income equality (i.e., how evenly income is distributed across a regional population) and the degree of regional economic diversification (i.e., degree to which economic activity is spread across sectors). Regardless of the specific types of data collected and measures used, it may be helpful to benchmark data collected against national averages to help identify trends and better inform the development of key strategies.
Blanchard, O, H Faruqee, and M Das (2010), “The Initial Impact of the Crisis on Emerging Market Countries”, Brookings Papers on Economic Activity,Spring:263-307.
Claessens, S, G Dell’Ariccia, D Igan, and L Laeven (2010), “Cross‐Country Experiences and Policy Implications from the Global Financial Crisis”, Economic Policy,62:267-293.
Didier, T, C Hevia, and S Schmukler (2011), “How Resilient Were Emerging Economies to the Global Economic Crisis?”, World Bank Policy Research Working Paper 5637.
Frankel, J, and G Saravelos (2010), “Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008–09 Global Crisis”, NBER Working Paper 16047, June.
Gourinchas, PO, and M Obstfeld (2011), “Stories of the Twentieth Century for the Twenty-First”, American Economic Association Annual Meeting, Denver, CO.