Wednesday, September 17, 2008

Wall Sts meltdown and the developing economies

Hardly anyone is talking about the impact of the Wall Sts meltdown on the developing countries. Here is one view from the WB'S PSD blog. I think the hurricane in the Wall Sts is going to affect the emerging economies more than the developing countries, which have immature financial market and are very loosely, if any, connected to the outside markets. I guess a large part of Sub-Saharan Africa and South Asia would not be affected. East Asian countries, China, India, and other emerging nations might feel some pinch though.

  1. The end of export-led growth: Just last week, Dani Rodrik wrote an article suggesting that the export-led growth that was typical of many Southeast Asian countries will no longer be nearly as viable for the developing world. As he points out, "[t]he most immediate threat is the slowdown in the advanced economies." The collapse of Lehman, the emergency sale of Merrill Lynch, and the troubles of AIG will only exacerbate this slowdown. I suspect Rodrik will look prescient on this one. (China, it seems, is already taking action to deal with an expected drop in demand for exports.)
  2. Financial sector regulation: Stock markets in many emerging markets are becoming increasingly democratized, as the middle class has seen greater access to equities as a vehicle for investment. However, these markets don't yet offer the kind of complex financial instruments seen on Wall Street. Financial authorities in the rest of the world will be watching closely. If U.S. financial markets rebound relatively quickly, the failure of Lehman will be seen as a triumph for creative destruction. The lesson will be that light regulation is best (even though, as Tyler Cowen points out in this NYT's article, Wall Street is not, in fact, as unregulated as is sometimes supposed). If the U.S. sees a prolonged recession, however, I would wager that we will see an impetus for greater regulation of the financial sector in many parts of the world as more complex financial instruments are introduced to emerging markets.