Emerging From The Global Crisis Macroeconomic Challenges Facing Low Income Countries

While the impact of the global crisis has been severe, real per capita GDP growth stayed positive in two-thirds of low-income countries (LICs), unlike in previous global downturns, and in contrast to richer countries. The crisis affected LICs not so much through the terms of trade or global interest rates, but rather through a sharp contraction in export demand, foreign direct investment, and remittances (oil exporters also suffered from a sharp fall in oil prices). LICs saw the sharpest decline in their economic growth rate over the last four decades. However, this slowdown followed a period of strong expansion, and real per capita GDP growth has generally held up in LICs, remaining well above growth in richer countries.

Although the impact of the global crisis has been severe, real per capita GDP growth stayed positive in two-thirds of low-income countries (LICs), unlike in previous global downturns, and in contrast to richer countries. Emerging from the Global Crisis explores how LICS have coped with the global economic crisis. It reviews the impact of the crisis on LICs, domestic policy responses to the crisis, and the precrisis conditions of select countries. The prospects and challenges that LICs face are also considered. Sections of the paper look at growth prospects, policy recommendations, the general macroeconomic outlook, as well as the rebuilding of fiscal buffers. The authors also "stress-test" LICs' exposure to further volatility by using a hypothetical "downside" recovery scenario.

This forthcoming title in the Departmental Paper Series describes the special challenges facing low-income countries as economic growth contracts by an estimated 1.1 percent globally. Coping with the Crisis: Challenges Facing Low-Income Countries provides an assessment of the implications of the financial crisis for low-income countries, evaluates the short-term macroeconomic outlook for these countries, and discusses the policy challenges they face. Chapters cover the outlook for global economic growth and commodity prices, an overview of how low-income countries have been affected, fiscal policy, monetary and exchange rate policy responses, potential external financing needs and how the international community, including the IMF, can help countries meet them. The challenges ahead for low-income countries are delineated, including debt vulnerabilities and the need for countries to develop well-regulated local capital markets and banking systems, as well as enhanced public sector efficiency.

Despite strong economic growth since 2000, many low-income countries (LICs) still face numerous macroeconomic challenges, even prior to the COVID-19 pandemic. Despite the deceleration in real GDP growth during the 2008 global financial crisis, LICs on average saw 4.5 percent of real GDP growth during 2000 to 2014, making progress in economic convergence toward higher-income countries. However, the commodity price collapse in 2014–15 hit many commodity-exporting LICs and highlighted their vulnerabilities due to the limited extent of economic diversification. Furthermore, LICs are currently facing a crisis like no other—COVID-19, which requires careful policymaking to save lives and livelihoods in LICs, informed by policy debate and thoughtful research tailored to the COVID-19 situation. There are also other challenges beyond COVID-19, such as climate change, high levels of public debt burdens, and persistent structural issues.

The rapid recovery in many low-income countries (LICs) following the global crisis has been sustained in 2012. Softening commodity prices have led to moderating inflation pressures in most LICs. However, progress in rebuilding policy buffers has halted over the past two years, despite continued strong growth in LICs.

Low-income countries are being hit hard by the global financial crisis. They are facing a sharp contraction in export growth, FDI inflows, and remittances, and lower-than-committed aid. But a marked recovery is in prospect for 2010 helped by rising world demand and supported by short-term domestic policies. Countries are using fiscal and other policies to respond to the crisis and should continue to do so, where appropriate, until the economic recovery is clearly underway. However, the risks to debt sustainability are rising and countries should begin preparing to realign policies toward medium-term sustainability once the recovery is clearly on the move. Additional highly concessional donor support is needed to ensure that countries are not forced to make these adjustments prematurely, and to facilitate a smooth return to a sustainable debt path, with strong growth, over the medium term.

We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries.

Globalization, by which is meant the increasing economic interdependence among nations, has been a critical ingredient in enabling enormous improvement in mankind's condition. While progress has not always been smooth, and has not come without dislocation for some, the economic policy challenge has been, and is, to enable the realization of the large potential benefits of globalization while simultaneously reducing the negative side effects and providing safety nets for those whose lives are disrupted in the process. This volume focuses on the successes of globalization, and some of the main economic policy challenges and solutions that arise to enhance the benefits and lower the costs. It covers different aspects of globalization, sovereign debt restructuring, development of the financial sector and financial crises in Asia, Turkey, Brazil, etc. The final part of the book covers multilateral international organizations, namely the World Trade Organization, the IMF and the World Bank. Contents: OverviewSuccesses of Globalization:Be Careful What you Wish ForTrade Policy and Economic Development: How We LearnIncreased Understanding of Supply Side EconomicsEconomic Policy Reform:DeToqueville's ‘Dangerous Moment’: The Importance of Getting Reforms RightThe Crucial Role of Financial Intermediation for Rapid GrowthLessons from the Asian Financial ExperienceEconomic Policy Reforms in Brazil and TurkeySovereign Debt Restructuring:A New Approach to Sovereign Debt RestructuringSovereign Workouts: An IMF PerspectiveMultilateralism for the Twenty-First Century:The Founding of the Bretton Woods Institutions: A View from the 1990sThe Clash between Economics and Politics in the World Trade OrganizationAt the Service of Nations: The Role of the IMF in the Modern Global EconomyAn Enduring Need: The Importance of Multilateralism in the Twenty-First CenturyLooking Forward:Postscript Readership: Economists, political scientists, policy makers, finance professionals, professors, students, and others interested in financial crises and globalization. Keywords:Multilateralism;International Economy;IMF;WTO;Financial Crises;Sovereign Debt;International Economic SystemKey Features:Focuses on the successes of globalization and some of the main economic policy challenges and solutions that arise to enhance the benefits and lower the costsCovers multilateral international organizations, namely the World Trade Organization, the IMF and the World BankReviews:“Anne Krueger has had an exceptionally distinguished career as both an academic economist and high-ranking policy official at the World Bank and International Monetary Fund. This wide-ranging collection of essays and speeches is full of wisdom and insight. Anyone interested in understanding the forces shaping the world economy will profit from reading this engaging and important book.”Prof. Douglas Irwin Department of Economics, Dartmouth College “These essays recount and celebrate the unprecedented growth of the world economy in the last half century, and the role of freer trade and other liberalizing reforms in bringing it about. They go on to explore the pitfalls and frustrations that had to be surmounted to achieve this success, and the present and future challenges confronting national and international policymakers. Throughout these pages, readers will gain from the accumulated experience, wisdom, judgment and observational acuity of one of the world's premier policy economists.”Prof. Arnold C Harberger Department of Economics, University of California at Los Angeles “Anne Krueger has been successful in arguing that economic reforms toward market mechanisms in developing countries are good; role of economic policies in making markets work is crucial; and strengthening of IMF, World Bank, and WTO is important. Her proposal as First Deputy Managing Director of IMF on the sovereign debt restructuring mechanism was an important insight, as we see Euro zone countries struggle to fight off a crisis. This book presents her thoughts on the topics on which she has worked for the past fifteen years. The book is a must-read for researchers, business persons and students in the field.”Prof. Takatoshi Ito Graduate School of Economics, University of Tokyo “Learning from experiences and anticipating, and then responding better to, future crises is the thrust of these well–reasoned, well–written essays.”CHOICE “The real benefit to the reader comes from reading the book in its entirely because Krueger has an unparalleled knowledge and experience with the real trade side of the economy, the international macro and finance side of the economy, and the international organizations that deal with managing the systems of global exchanges. Ultimately, even when Krueger's ideas about the way forward are not fully persuasive, they contain wisdom, are worth thinking about, and provide a starting point for anyone who wants to contribute to this debate. Struggling with Success is highly recommended to anyone who cares about the future of globalization.”Global Journal of Economics