Is a New Paradigm for Recovery in Developing Countries Emerging?

From a policy brief from the United Nations University: We have already witnessed over the past year brave and even imaginative efforts by many developing countries in order to cope. Developing countries with the largest and strongest economies, such as China, India and Brazil, have shown encouraging early signs of recovery after implementing timely countercyclical policies. In many African countries governments have been proactively attempting to protect their economies. In many (including Botswana, Mauritius and South Africa) governments have increased their expenditure. Ghana, facing a large budget deficit, is negotiating assistance from the IMF. Kenya and Tanzania are carefully monitoring their economies. The African Development Bank reacted quickly by identifying the most vulnerable countries and making emergency finances available. Many longterm investment projects in Africa, many in critical infrastructure, seem to remain in place.

The fact that many developing countries can now act in this way is quite in contrast to their actions during previous global recessions, such as those in the early 1980s, 1990s and in 1998. Then, developing countries, especially those in Africa, were much less well-managed. Deficits were high and reserves were low. Consequently, when global growth declined, these economies shrunk substantially. This time around, with a few exceptions, developing countries have, on average, had more leeway: deficits are lower and reserve holding is much better. In Asia, valuable lessons were learnt after the 1998 financial crisis, the actions Developing countries should not expect too much assistance from the rich world implemented in response to this have resulted in their economies becoming less vulnerable to financial shocks. Many countries here, such as China and South Korea, accumulated large foreign exchange reserves in order to insure themselves against such crises. While this reflects on an international financial system that is not trusted by developing countries, it does show that developing countries can and will act in their own best interests.

It also needs to be pointed out that improvements in macro-economic management in many developing countries have resulted in improvements in governance – including improvements in many African countries. These improvements, including more robust democracies; more frequent elections; initiatives to reduce corruption and end conflicts; and to empower women, are largely home-grown. It would be very difficult to argue that they were the outcome of Western aid or pressure. This means that better governance, which leads to better resilience in the case of financial and economic shocks, have most often been achieved without, or even in spite of, Western aid.

If this crisis can ever be said to have a positive outcome, it may be that of developing countries showing that they can and should manage by themselves and collaborate with regional institutions and the UN development system. They still are – and this is another lesson from the crisis – very dependent on global economic growth, but unlike in the past, the extent of the rest of the world’s, in particular the West’s, dependence on developing countries is also becoming abundantly clear. Demand in the West will be low and sluggish for years to come. Global growth depends now more than ever on growing demand in developing countries. The days of the USA as a ‘consumer of last resort’ (as described by Joseph Stiglitz) are over.

The full document [pdf] is here