The differences in understanding financial crisis in Emerging and advance economies

(Comments)

There is differences if we want to understand what made advance economies worse in 2008. Based on research from Didier, here are the points 

Four different factors emerging and advanced economies p.3

1. The first and most obvious one is that the root of the problem was in the financial markets of the advanced economies, and emerging economies had a low exposure to these markets relative to other developed economies.

2. to the extent that there is a convergence process, emerging economies typically grow at a higher pace than advanced economies. Therefore, a recovery of their growth trajectory would make emerging economies’ output converge to the pre-crisis level sooner.

3. The third reason is related to international trade. As the U.S. economy came to a standstill in late 2008, firms anticipated an accumulation of inventories and stopped their international orders.3 This generated a collapse in production in several emerging economies focused on supplying manufactures to the world. As inventories decreased, and it became more likely that global demand would stabilize, firms reignited their production and overall economic activity in emerging markets expanded. Thus, emerging economies were able to generate a faster recovery than developed economies, for which manufacturing accounts for a smaller share of GDP.

4. fundamental change in theway emerging economies conducted their policies relative to the past. Historical evidence suggests that emerging economies usually lack the policy tools to deal with external shocks that are available to advanced economies. Previous worldwide turbulent episodes found most emerging economies unable to perform countercyclical policies.

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