The Impact of the Credit Crisis on Poor Developing Countries and the Role of China in Pulling and Crowding Us Out

We show that the credit crisis of OECD countries has a negative impact on the growth of the world economy according to an error correction model including China and Australia. This causes negative growth effects in poor developing countries. The reduced growth has a direct or indirect impact on the convergence issue, aid, remittances, labour force growth, investment and savings, net foreign debt, migration, tax revenues, public expenditure on education and literacy. We estimate dynamic equations of all these variables using dynamic panel data methods for a panel of countries with per capita income below $1200 (2000). The estimated equations are then integrated to a dynamic system of thirteen equations for thirteen variables that allows for highly non-linear baseline simulations for these open economies. Then we analyze the effects of transitional shocks as predicted by the international organizations for the OECD and world growth for 2008 and 2009. Whereas growth rates return to the baseline scenario until 2013 with overshooting for China and Australia, the level of the GDP per capita shows permanent effects, which are positive only for China. In the poor countries, investment, remittances, savings, tax revenues, public expenditure on education, all as a share of GDP as well as literacy and the GDP per capita, are reduced compared to the baseline until 2087 where our analysis ends. Investment, emigration and labour force growth start returning to baseline values between 2013 and 2017. GDP per capita and tax revenues start returning to baseline around 2040. Education variables do not return to baseline without additional effort. Significantly positive short-run effects (the lagged growth rates) show that China has an impact on Australia, which has an impact on the OECD, which in turn affects the rest of the world. ROW has a significantly positive feedback effect on China.