Some Reflection on the Current Global Crisis from a Developing Countries Perspective

This the summary of the article with same title wrote by Frenkel, Roberto and Rapetti, Martin, herewith to access their original version


Financial crisis started in US has been rapidly impacting national economy throughout the world. This global financial crisis has been a shocking phenomenon faced by the world, and most analysts agree that the world economy is going through the worst crisis since the Great Depression and according to IMF the crisis is ‘the biggest contraction in the last 60 years’ (p. 1)

In their briefing paper Frankel and Rapetti want to explicate that global financial crisis has a wide but different impact on developed and developing countries. The crisis actually could be predicted and, therefore, smoothly went through as they states implicitly in their introduction ‘modern mainstream macroeconomic theory failed to predict the current financial and economic crisis, because they systematically neglected important knowledge and insight that were widely known by previous generations of economists (p. 2). Minsky’s model of financial crisis, boom-and bust-cycles model, has been observed in a number of crises such as in Argentina and Chile (1979), Mexico and Argentina (1990), Brazil (1999), Turkey and Argentina (2001) (p. 3).

US economic chaos spreading throughout the world has been a consequence of behaviors of world societies dragged into economic-game of US.  Crisis also has indicated that market mechanism is still playing its roles i.e. to correct market actors that do not comply with principles of market fundamental. Besides, the crisis has provided important lesson which is principles of liberal market world still submits to have been doubted. However, in their conclusion remark the authors hold that there are signs that, due to the current global crisis, insights form Keynesian economic theory would have a comeback (p.7).

Financial fragility has been a special feature of capitalist economy because the economy has rooted in speculation. According to theory of Minksyan, financial crisis comes after economic booming in which credit soars uncontrolled and economic actors boldly take many speculations, or after ‘confidence increases and risk perception reduces’ (p.3). In another term, crisis of financial is due to a speculative bubble. A speculation on sharply increasing in assets price because of optimistic expectation about the future (p.3) regarding quality of the asset in finance market actually has reflecting an increasing in prices that do not match with the fundamental asset which is fragile. Like a balloon, it boasts but only contains gas and in a certain point the balloon must burst and create a crisis. This prediction is actually described by Minsky through his theory of financial crisis (Minskyan Circle) (p.3)

However, there is a key difference between the crises in emerging market economies and the subprime crisis in US (and other crises in developed countries). And the difference lies of the factors that kick off the booming phase of the Minskyan circle (p.3).

Financial crises imply wealth losses and financial disintermediation, but the effects in developing countries are definitely more complex. In these countries crises also derive in wealth loss, credit contraction and a fall in aggregate demand with recessive effects on output and employment (p.5).

Hence, as a part of the processes of recovery and avoid instability and crises in future, financial crisis could be an interest lesson and learned by developing countries through strengthening their regulation of domestic financial system which in same time combined with macroeconomic policies which includes the exchange rate policy and the policies related to the management of the balance of payments and the stock of foreign exchange reserves (p.4). To come out of today crises, almost all countries has launched various forms of stimuli package and this stimuli package has been intended to rescue financial institutions which in the near future it is expected to prevent a lingering economic crises, including Obama Administration has launched a significant fiscal stimulus package  of $787 billion in February 2009 (p. 4)

Recovery from global crises of economic needs global cooperation and IMF must have keep playing its roles, despite its allegedly incapability of recovering the crises, in distributing fund to developing countries impacted by the crises. However, it must be keep in mind that there are a conditionality demanded by the IMF in its financial assistance programs, that traditionally IMF has promoted adjustment programs based on restrictive fiscal and monetary policies(p.6). But, today the conditionality is less restrictive and more specific than in past. The institution also promotes expansive fiscal policies for both developed and developing countries in order to counteract the recessive trends triggered by the global crisis. Notwithstanding this positive change in its approach to crisis response, the IMF has paid little attention to the problem of how developing countries may finance those policies (p.6). And, therefore the assistance program provided by IMF should focus on two points (p. 6):

(1)   direct beneficiary of the fiscal program should be the most vulnerable people. They should be reached through social security, health and education program;

(2)   the fiscal program should aim to reinforce physically infrastructure, the protection of the environment and the development of technology.

Indeed, coordination of strong economic policies is needed to overcome economic downturn. In any case, recovery program implemented so far has indicated a positive direction. New initiatives have been taken during G20 meeting to make improvements for preventing the crises of becoming recurrent and these should involve more emerging economies which their roles have been more and more important in global dynamic.  Regarding this, developing countries have chances to be more assertive in voicing their interests within a broad agenda that helps them to deal with a problem discussed here.

Reference: Frenkel, Roberto and Rapetti, Martin. Dialogue of Globalisation, Some Reflection on the Current Global Crisis from a Developing Countries Perspective. FES Briefing Paper 6 (May 2009)


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