The Performance of the Developing Countries Before and After the Global Turmoil: The Impacts, Policy Responses, and Predictions
Abstract
The neoliberal era is now more than a quarter-century old, dating from around 1980. The main concepts that neoliberalism issues are the liberalization and globalization of the domestic economies and its relation to the growing role of the 'finance' in the economies all over the world. The articulation process of the developing countries to the 'globalized world economy’ has not been healthy and came with some structural problems, since then, the developing countries have experienced many fluctuations.
In the 2002-2009 period, the developing countries have achieved a spectacular economic performance. The expansionary environment in the world economy caused to increase in the trade volume, especially the exports of the developing countries to developed countries until the crisis period. However, the financial crisis had contractionary effects in a world economy that caused the financial reversals and decline in the trade volume in the world. In this study, the economic performance of the developing countries is examined and before and after the crisis periods are compared over selected countries . Those countries that did not react the economic downturn successfully and unable to conduct appropriate fiscal and monetary policies (for that time it was countercyclical policies) were severely affected by the crisis. Furthermore, since there is a strict dependence relationship between developing and the developed countries, one way to understand the stance of developing countries at pre and post crisis eras is examining the unsustainable policies which were carried out in advanced economies.
Keywords: Comparative Study, Country Study, Developing Countries, Developed Countries, Financial Crises, Trade Policies, Structural Problems
Introduction
The recent global crisis that has occurred in the US mortgage market and spread to all over the world, had led the economies to experience a considerable downturn. The main destructive characteristic of the crisis was the collapse of the financial systems, especially in the developed countries. At that time, some developing countries handled the crisis better than the developed countries. Since the ‘developing world’ is not as homogeneous as ‘developed world’ the impacts and ability to cope with the crisis changes from country to country. There have been some attempts to explain the heterogeneous effects of the crisis on developing countries however, the existing literature on cross-country difference is limited and fails to draw consistent conclusions (Cömert and Uğurlu,2015) However, even though, some of them were severely affected, in general, the overall situation and effects of the global financial crisis were not as destructive as developed countries in developing countries. In general, Developing countries did not experience financial system collapse (Cömert and Çolak, 2015) . However, although the effects of financial shocks are not destructive as much as the developed countries, developing countries lost their growth performance what they achieved before the crisis. Indeed, the worst effect of the crisis that developing countries encountered was the decline in the exports and the financial reversals. The degree of openness, the geographical concentration, and composition of export products were important factors for these countries. The contraction of trade volume strictly affected these countries since the type of their products consist of high-income elasticity goods which are the epicenters of the crisis (Cömert and Uğurlu,2015). In addition, even though they achieved some high rates of growth they did not try to solve their structural problems and the weaknesses.
In this study, I will focus on 5 countries; Russia, Armenia, Brazil, Mexico and Turkey, and come up for discussion the relationship between the economic performance of them before and after the global turmoil in a comparative study. I will make use of the comparative analysis to determine the reasons that are behind the weak performance of these countries and try to give an expression of the 'original sin' . Furthermore, I will investigate that if the structural problems and the ‘accumulated vulnerabilities ‘are still available. By considering today’s stance, the future implications and predictions about the future of the South will be argued. The outline of the paper as follows: Firstly, I will focus on the developing countries and the argue the experiences of them with the financial crises. Secondly, I will discuss the magnitude and duration of the recent financial crisis by making a comparison between pre and post-crisis eras and determine which channels the developing countries were affected at most by the financial crisis. Thirdly, I will investigate the policies that were conducted by the governments to response the effects of the financial crisis. Fourthly, by comparing the effects and the responses of the developing countries I will try to make an inference about the structural problems of the developing countries that they have been accumulating. The last section explains and concludes the common story by adding some predictions about the future of the developing countries.
Performances of the Developing Countries Prior to Crisis
After 2001 crisis, developing countries experienced an economic environment which had better conditions. In such an environment, developing countries under the investigation reached high growth rates. At the 2002-07 period, the overall performance of these countries was more successful relative to the advanced countries. Growth in the South no doubt shows a rapid shift in the new millennium compared to previous decades, including even the postwar ‘Golden Age' era. (Akyüz, 2012)
At the end of the 90’s and early 2000’s, there was a disarray in the developing world. East Asia was suffering from the 1997 crisis while other developing countries were falling into other crises. Brazil and Russia experienced 1998, Turkey 2000-01 and Argentina 2001-02. However, all these changed in the new millennium. From 2002 until the outbreak of the subprime crisis, developing countries reached high growth rates and the average of the Emerging Market and the Developing countries’ growth rate about more than five percent than the Advanced Economies. The ‘unprecedented’ acceleration in DEE’s economic activities doubled the average growth rates from the 90-2000 period.
Source: IMF, WEO, October 2013 and World Development Indıcators (WDI), Retrieved from, Cömert and Uğurlu,2015.
Although almost all developing countries experienced high performances at their economic activities and reached high rates of growth, the growth patterns of these countries differ from one to another over the last several decades. For example, the developing Asia and the Commonwealth of Independent States experienced the largest increase. (Cömert and Uğurlu,2015)
In this era, the acceleration of the growth rates was significantly related to mixing of four ingredients: 1) High global demand, 2) Exceptional Financing, 3) High commodity prices, and 4) For a significant number of countries, large flows of remittances mainly resulting from consumption and property bubbles in advanced economies. (Griffith –Jones and Ocampo, 2009)
After the crisis environment of late 90’s and early 2000’s, the developed countries began to carry out the expansionary policies. In the US, policy makers decided to use monetary expansion in order to minimize the depth and the duration of the crisis arising from the bursting of the US high-tech bubble in 2000 and the September 11 attacks of 2001. In addition, many developed countries brought the interest rates down in order to avoid the deflationary spirals (Cömert,2013). In such an environment and given open financial markets, due to the exceptionally low-interest rates and the increase in liquidity in the advanced economies, there was financial capital flows from developed countries to developing countries.
The new millennium witnessed a rapid growth in world trade which increased, in nominal dollars, by 2.5 times by 2008, with the average growth in total exports reaching twice at the rate of growth of the world output (Akyüz, 2012). At that time, the share of the developing countries in world trade increased. The growing trade deficit of the US fed the current account balances of its trade partners. In addition, the high growth performance of China and India together with some other BRIC countries such as Brazil generated extra demand for raw materials and goods of other developing countries (Cömert and Uğurlu,2015). At this stage,there is an important issue of how much the trend of growth of the developing countries depends on the developed world emerges.
‘’For the past hundred years, the rate of growth of output in the developing world has dependent on the rate of growth of output in the developed world. When the developed grow fast, the developing grow fast, and when the developed slow down, the developing slowdown. Is this linkage inevitable? More specifically, the world has just gone through two decades of unprecedented growth, with world trade growing twice as fast as ever before.'' (Lewis,1980)
In that argument, according to the Lewis the trade as the main link between South and North. His main concern was when there would be a significant decrease in world trade, the south would not be able to make significant progress in development. He then went on to propose that developing countries should develop internal and regional markets to gain greater autonomy. (Akyüz, 2012). As the dependency relations with the North is getting deeper, the periods that have economic growth have also included ‘the growth of vulnerabilities' for the South.
Graph 1.1, The Current Account Balance of Emerging and Developing Countries
Source: IMF, WEO
Table 1.2: The share of US Imports Among the Countries
Source: United States Census Bureau
At that era, the developing countries also enjoyed the workers' remittances. The middle-income countries reached 1.6 per cent of GDP at 2002, it raised from around the 1.3 at 2001 respectively. The rapid growth of the remittances, at an average rate of 20 per cent, rising from around 100 billion dollars to 320 billion during the crisis period. Much of these remittances came from advanced economies, and some major ‘rising economies' were among the top of these receivers such as Indıa, China, Mexico, and Indonesia. Before 2008, the remittances reached the 1.7 per cent of the GDP
Graph 1.2: The Personal Remittances of Middle-Income Countries (%of GDP)
Source: World bank, WDI
In addition to the positive outlook for the world economy, the governments of the global south conducted some economic policies those have the positive impact on the domestic economies (Bibow,2010). Inflation reducing macroeconomic policies, strengthening of the financial markets and regulation of the banking sector made developing countries more attractive to meet with the external financial flows. Domestic currency appreciation due to these financial flows reduced the debt to GDP ratio and increased the export revenues of developing countries . In addition, high growth may increase tax revenues, which contribute to the improvement in public balance in developing countries (Cömert and Uğurlu,2015). Last but not least, currency appreciations related to high financial flows served as anchors to inflation in many developing countries (Benlialper and Cömert,2014)
Indeed, both positive environment in the world economy and some policies conducted by domestic governments, the developing countries experienced unprecedented economic performances at that era. However, since the main reasons behind the successful performance of the developing countries are mostly due to the external developments, it can be stated that the global south accumulated vulnerabilities as it performed an economic growth.