The Global Financial Crisis and the Developing World: Transmission Channels and Fall-outs for Industrial Development

Executive Summary
Over the last three decades, globalization has largely proceeded based on the belief in the self- regulatory capacity of markets without adequate structures and systems in place to govern the process. By mid-2007, this has led, to the appearance of large cracks threatening the stability of the world economy on two fronts: the sharp hike of primary commodity prices and the global financial crisis. The latter is the consequence of the global savings glut and the associated global macroeconomic imbalances, which evolved since the financial crises in the 1990s that severely disrupted economic growth and development in a large number of emerging economies in Asia, Latin America and transitional economies. The flow of large savings into the United States economy, facilitated by the easy monetary condition, led to the housing and credit boom, which had eventually ended in the sub-prime mortgage debacle. Unsurprisingly, in the context of contemporary financial globalization, this seemingly localized phenomenon could not be contained within the United States financial system and rapidly spread to the other major financial centres. For a year or so since mid-summer 2007, the financial turmoil, with its severe liquidity and credit crunch, seemed to be confined more or less to financial markets and institutions in the United States and Western Europe. On the whole, the world economy managed to maintain its momentum on the back of the buoyant economic growth posted by emerging market economies as well as resource-rich developing economies that enjoyed a commodity boom. However, a series of events that hit major financial institutions on Wall Street in mid-September 2008 shocked the world and altered radically the fate and the course of the globalized economies. The fear of accelerating inflation and fuel and food shortages worldwide was completely overtaken by a greater fear of possible worldwide recession and depression engulfing all economies in the developing world, including emerging market economies in Eastern Europe, Latin America and Asia, as well as low-income developing countries in Africa, Asia and the ECLAC region with limited financial market linkages. No country has been in a position to remain a mere bystander in the fast evolving financial crisis any longer. By the end of 2008, the world economy had rapidly entered a phase of globally synchronized slowdown and, in the first quarter of 2009, headed towards a global recession. The speed at which the world economy had fallen victim to the recessionary wave of financial turmoil in the United States and Europe caught everyone by surprise. In the second quarter of 2009, some signs were emerging indicating that the worst might be over following the large-scale counter-cyclical policy packages put in place by a number of larger developed and emerging market economies together with their massive liquidity injections into banking systems to mitigate the scale and depth of the recession. Yet, enormous damage has already been inflicted on the real sector activities resulting, in particular, in a worldwide contraction of industrial production due to the severe global credit crunch and fall in world trade unprecedented in the post-war era.download