World Financial Crisis: Possible Impact on Developing Economies

Abstract

The emerging economic and financial globalization in recent years has been much more rapid that our understanding of all ingredients associated with this phenomenon of globalization. As a result, the impact that the current crisis may have on the global economy is still uncertain, since an adequate theoretical framework for globalization is still missing.

Any evaluation of the possible impact on developing economies should consider the exiting conditions in the banking sector; the situation in the non-bank intermediation; the tendencies on foreign exchange markets.

The best strategy to cope with such events is to use the optimal combination of policy ingredients that will minimize the undesirable effects on the economy. In parallel, the government needs to be prepared for quick reactions to any new situation. In the financial sector, creation of government deposit guarantees might be very useful, together with the suspension of deposits convertibility, and the adoption of an effective deposit insurance system. Investment plans should be reanalysed carefully and priorities should be revised; a revised strategy for attracting FDIs is absolutely necessary. Budget deficit must be reduced considerably, and efforts for passing to a surplus of the state budget are more than welcome. Measures to reduce the adverse impact of financial system distress on the real economy may need the adoption of corporate restructuring programs and debt relief for households. More than the implementation of the right policies, what it really matters is the speed of reaction of the government. Time for excessively long consultations is gone; a Crisis Council may be constituted, entrusted with full power of decision.

Keywords: Financial Markets, Financial Markets and the Macro-economy, International Finance, International Financial Markets, Government Policy and Regulation

JEL Classification: D53, E44, F37, G15, G28