The Impact of the Current Crisis on Emerging Market and Developing Countries

When analysing the relations between developed economies and emerging market and developing economies, it is easy to see how the latter have been traditionally dependent and influenced by the cyclical behaviour of the former and by the turmoils generated in them. Expansions in advanced economies implied a positive development framework for developing countries, which benefited from higher export flows and from a suitable financial environment in the shape of higher capital inflows. By contrast, recessions in developed economies dragged developing economies with them due to the negative impact generated on exports and net capital inflows. Even more, the economic deterioration in developing economies was aggravated by episodes of currency and banking crisis and by the inability of these countries the application of anti-cyclical policies. In fact, the need to restore some sound macro-economic foundations, mainly to reduce fiscal unbalances and ensure capital inflows, forced to apply restrictive demand-side policies, which, in turn, damaged the economic situation. The final result was a strong convergence and synchrony of the economic cycle of developed and developing economies, but where the cycle volatility was bigger for the latter.