Working Paper 42 - Global Financial Crisis: Implications and Lessons for Africa

The global financial system has witnessed rapid growth and substantial structural change duringthe last ten years leading to globalisation of financial markets. The integration of financial markets hasaccentuated the rapid flow of capital across borders as well as magnified the contagious effects offinancial crisis with wide implications for transmission of financial policies on the domestic economy andinternationally. The recent financial crisis which originated in East and South East Asia (hereafter Asia)and transformed into a global crisis is a case in point. At no time since the depths of the LDC debt crisisof the 1980s has the outlook for emerging markets appeared so bleak. Economic outlook in Asia andits financial crisis appears destined to last well into 1999, and the world faces the prospects of weakergrowth. This paper reviews recent trends in global financial markets, in particular the expanding financialturmoil, which was been triggered by the Asian crisis. It examines the major factors behind financialturmoil and its impact on African countries. The paper also explores the main lessons and policyimplications for African countries. Following this introduction, Section II gives a brief account of thedynamics of the crisis—its origin and channels of transmission from one region to another. Section IIIexamines the main causes of the crisis and Section IV provides a discussion of the qualitative andquantitative impact of the crisis on African countries. The main lessons and policy implications are drawin Section V. Section VI provides the concluding remarks.