A developing country view of the current global crisis: what should not be forgotten and what should be done

Roberto Frenkel and Martin Rapetti

Cambridge Journal of Economics, 2009, vol. 33, issue 4, 685-702

Abstract: Macroeconomic theory will surely be affected by the current global crisis. There are signs that some 'old' theories and insights will have a comeback. This paper argues that among them economists should not forget the lessons that have been learnt from three decades of several financial crises in developing countries. We emphasise two important lessons. First, preventing crises in developing countries requires not only the regulation of domestic financial systems, but also a consistent set of macroeconomic policies. In particular we stress the need for consistency between the exchange rate rule, the capital account regime and the domestic financial market regulations. Second, financial crises in developing countries tend to worsen both the balance of payments and the fiscal balance. Traditional adjustment policies tend to exacerbate the recessive trends in output and employment. This is just the opposite of what is required and what governments in developed countries are able to do. Developing countries should push for an agenda that helps them deal with these problems. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Date: 2009
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