The Impact of financial crisis in developing countries

From 2007 to 2009, the global financial system and economy entered an unprecedented severe crisis and the deepest recession since World War II. If losses by financial intermediaries in the 1929 and 1933 crises were estimated to account for 4 percent of the United States gross domestic product (GDP), the overall cost of the 2007–09 crisis far exceeded the previous one, with the banking sector losing $1.7 trillion, equivalent to 11.8 percent of U.S. GDP (White, 2009). Throughout 2009, there was great debate over the origin and development of the crisis. Even though most of the fundamentals causes have been widely treated, there is concern about its consequences, and the global economic recession that it brought. While developed economies struggled to find more suitable economic policies to cope with this exceptional recession, growth estimates for 2008 and 2009 in developing countries, such as in Africa, were continuously revised. A key question is, therefore, to what extent the global crisis affected the developing world as the full spread of the global economic crisis. The chapter reviews the main causes of the crisis in more advanced countries and then analyzes the situation of the developing countries, to investigate the extent to which the crisis affected their macroeconomic conditions. It ends with a review of the policy response, the role of the leading economies and the international institutions, in this period of liquidity constraint, to identify economic priorities to help those countries recovering from the crisis and increasing their well-being.