Transmission of the Great Recession from Advanced to Emerging Economies

• Author: Andrew Swiston
• Pages: 1-3

Page 1

The global financial crisis of 2008-09 set off a great recession that hit both advanced and emerging economies. Many emerging markets without direct exposure to the toxic assets at the root of the financial crisis in advanced economies experienced sharp output declines nonetheless. Predictions of a decoupling among emerging markets did not materialize, as economic activity in both advanced and emerging countries declined by over 4 percent in 2009 relative to April 2008 fore-Page 2casts. Of the 33 emerging markets for which seasonally-adjusted quarterly real GDP data are available, 29 experienced downturns over the most intense part of the recession, the last quarter of 2008 and first quarter of 2009. Real exports fell in all these countries by an average of nearly 15 percent.

Attempts to identify ex ante determinants of the impact on emerging markets and its variation across countries have drawn from the previous literature on crisis determinants (see, for example, Kaminsky and Reinhart, 1999). Three cross-sectional studies find that financial vulnerabilities are strongly associated with the impact of the crisis. In Blanchard, Das, and Faruqee (forthcoming) the pre-crisis ratio of short-term external debt to GDP and GDP growth among trading partners are significant determinants of the magnitude of the downturn during the crisis for a sample of 29 major emerging markets. In Lane and Milesi-Ferretti (forthcoming) high pre-crisis current account deficits and rapid pre-crisis credit growth, in addition to economic activity among trading partners, explain the growth of economic activity in 2009 across advanced and emerging economies. In Berkmen and others (2009) pre-crisis loan-to-deposit ratios and credit growth are negatively associated with output revisions in emerging markets. These studies found no effects on growth outcomes from the level of international reserves or openness variables such as ratios of trade or financial assets to GDP.

Most studies of the transmission channels through which the crisis affected emerging economies rely to some extent on pre-crisis data, but illustrate the potential variety and magnitude of transmission mechanisms. This review focuses on trade, bank lending, and financial markets.

The sharp observed drop in global trade and the importance of partner-country growth in the above studies underline the importance of trade channels in transmitting the impact of the crisis. Bems, Johnson...