Inequality remained constant in Asia, but increased in Latin America (LA). Trade balance has been increasing in Asia due to fall in imports, more than rise in exports. Banking systems improved in Asia after the Asian Financial Crisis. However, there is huge diversity in the quality of the banking system across regions. Equity markets collapsed initially after the crisis, but have shown a strong recovery after 2009. It was predicted that remittances would be the first to get affected after the crisis (Chhibber et al., 2009). But this did not happen.
In the period just before the crisis, LA was making advancements in GDP growth, as well as other macroeconomic and human development indicators. The crisis impacted the economy through four major channels: external financing, demand for exports, commodity price and remittances. There was space and scope for counter-cyclical monetary policy. However, these countries faced a recession. Social indicators were hampered. In most countries, banks had liquid assets, CA surplus and debt burdens which could be repaid. The main consequences of the crisis on Latin American countries were recession, increased poverty, unemployment, less remittances and less foreign financing (World Bank, 2009). As investor confidence returned, risk spreads declined to almost pre-crisis levels. Initially, trade and industrial productions declined at the time of the crisis. Commodity prices declined, lowering the value of exports and income in many Latin American countries. Exchange rates have remained constant. Equity markets have recovered and spreads on sovereigns have declined as well. Countries have started accessing international capital markets (World Bank, 2010, p. 28). The most important challenge is to reduce the fiscal and monetary stimulus without hampering recovery, create more job opportunities to reduce unemployment and maintain an open attitude to international trade (World Bank, 2010).
As the crisis spread, there was a decline of capital flows and the impacts were strongly felt by countries like South Africa whose financial markets were closely integrated with the global financial markets. The impacts were channelised to the oil-exporting countries as trade declined. Overall, growth decreased by four percentage points in 2008–2009 (World Bank, 2010). In the face of rising risk and uncertainty, policy had the most important role to play. The need was to ensure the poor was least affected and implement social safety nets. Also, foreign aid declined due to the crisis. The IMF improved financial and technical assistance to the affected countries to accelerate recovery. The improved growth rates and relatively strong balance sheets in the pre-crisis period were the main immunisations against the GFC. States with weak governments and financial institutions were more affected by the crisis due to a lack of regulation to protect the financial markets and funds to pursue policies to safeguard against the shock. Those countries with a concentrated bank portfolio were more affected by the crisis. That is why it is always favourable to have diversified bank portfolios. Countries like Nigeria which had borrowed for investment in the stock market due to high equity returns were at a higher risk (IMF, 2009). Africa’s growth rates started accelerating from 2010, by which time the world as a whole started recovering from the crisis. The decline was to 2.6% but persisted for a very short period of time. The recovery was brought about by counter-cyclical policy measures. Foreign inflows, remittances and FDI were not significantly affected by the GFC, contrary to what was predicted. Even though uncertainty persisted, strengthening of oil prices and global demand aided recovery. In Nigeria, Africa’s largest oil exporter, the non-oil sectors were supported by the revenue generated from oil-producing sectors. South Africa benefitted from the recovery of its export demand from emerging Asia and manufacturing export demand from Europe. The low-income countries in the region were less exposed to foreign trade, and foreign capital was less affected by the crisis. This was because the crisis spread through globalised financial markets (IMF, 2010).
Regional Analysis
We now consider the performance of our sample of countries, divided into Latin American countries, Asian countries and countries in SSA. The growth rate of GDP per capita fell in the years 2008–2009 immediately after the financial crisis (Table 1). Subsequently, it recovered in all the three regions during the period 2010–2015. The fluctuations, both the fall and the recovery, were the least in the case of LA. However, Asia region, which grew the fastest before the crisis, slowed down the most in the 2008–2009 crisis years. The African and Latin American countries in our sample had similar growth rates before the crisis, but the African countries which had a lower per capita income fared better after the crisis. Furthermore, in LA the growth rate for the period 2010–2015 was lower than that in the period 1990–2007. In the case of Asia and Africa, the growth rate for the period 2010–2015 was higher than that in the period 1990–2007. This suggests that the crisis had a more lasting effect on the Latin American countries.
As far as GFCF is concerned, it rose in 2008–2009 immediately after the crisis despite the slowdown in growth (Table 1). Subsequently, in the period 2010–2015, it decreased for LA and SSA while it continued to rise in Asia. It is important to note that for all the three regions the share of GFCF in GDP was higher post crisis as compared to the period before the crisis. Furthermore, while the share of GFCF was very similar in LA and SSA before the crisis, it was considerably higher in SSA after the crisis.
The trends in the countries of the three regions are very similar. The share of XG&S in GDP increased in all three regions, particularly LA, in the years 2008–09, in the immediate aftermath of the crisis. Subsequently, during 2011–2015, the share fell in LA and Asia but continued to increase in SSA. The shares in LA and Asia were very similar at the end of the period as they had been at the beginning. But for SSA, they were substantially higher. The exchange rate continued to depreciate in SSA during the period 2010–15, whereas it did not do so for LA and Asia.
The CAB improved for countries in LA and Asia during the period 2008–2009 because of the surge in exports. The increase in GFCF coupled with the improvement in the CAB implies a massive increase in savings. But in the case of Africa, the increase in the share of GFCF in GDP, from 18.4% to 23.5%, was much larger than the increase in Asia and LA. Savings could not increase correspondingly. So, despite an increase in the share of expor ts in GDP, the CAB deteriorated substantially.2
Table 1. Regional Performance
In the recovery period, 2010–2015, the CAB deteriorated in LA and Asia. The share of exports in GDP fell sharply in LA so that despite the fall in the share of investment in GDP, savings fell considerably. Savings in the period 2010–2015 as a share of GDP were lower in the period 2010–2015 than they had been in the period 1990–2007. In Asia also there was a slight fall in the savings rate in the period 2010–2015, but the CA remained in surplus. In SSA, the savings rate declined in the period 2010–2015, but as the investment rate declined considerably, the CA improved though still being worse than in the period 1990–2007.
The high savings rates achieved during the crisis years of 2008–2009 could not be sustained, and fell in all three regions, particularly in LA where the GFCF ratio fell and the CAB deteriorated. Africa’s savings rate in 2010–2015 was still substantially above that in 1990–2007. In the case of Asia, the decline in the savings rate was very small such that the GFCF increased with only some worsening in the CAB.
In brief, Asian and African countries achieved rapid growth after they had adjusted to the crisis. However, Asian countries raised their savings rates and so could maintain their investment rates while maintaining a sustainable CAB. Further adjustment to reduce the high CA deficits in Africa might be needed to sustain higher growth rates. Latin American countries still face major problems of adjustment as investment rates have fallen and CAB has deteriorated.
The behaviour of these regions depends in part on the policies adopted by the governments or the behaviour of important policy variables. All the three regions followed an expansionary monetary policy during
