Table Of ContentUNEXPECTED
OUTCOMES
How Emerging Economies Survived the Global Financial Crisis
Carol Wise, Leslie Elliott Armijo, and Saori N. Katada, Editors
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Unexpected
Outcomes
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Unexpected
Outcomes
How Emerging Economies Survived
the Global Financial Crisis
Carol Wise
Leslie Elliott Armijo
Saori N. Katada
editors
brookings institution press
Washington, D.C.
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Copyright © 2015
the brookings institution
1775 Massachusetts Avenue, N.W., Washington, D.C. 20036
www.brookings.edu
All rights reserved. No part of this publication may be reproduced or transmitted in any
form or by any means without permission in writing from the Brookings Institution Press.
The Brookings Institution is a private nonprofit organization devoted to research,
education, and publication on important issues of domestic and foreign policy. Its principal
purpose is to bring the highest quality independent research and analysis to bear on current
and emerging policy problems. Interpretations or conclusions in Brookings publications
should be understood to be solely those of the authors.
Library of Congress Cataloging-in-Publication data
Unexpected outcomes : how emerging economies survived the global financial crisis / Carol
Wise, Leslie Elliott Armijo, and Saori N. Katada, editors.
pages cm.
Includes bibliographical references and index.
ISBN 978-0-8157-2476-6 (pbk. : alk. paper)—ISBN 978-0-8157-2477-3 (e-book) 1.
Developing countries—Economic conditions—21st century. 2. Developing countries—
Economic policy—21st century. 3. Finance—Developing countries. 4. Financial
crises—Developing countries. 5. Global Financial Crisis, 2008–2009. I. Wise, Carol.
HC59.7.U468 2015
330.9172’4090511—dc23 2014036717
9 8 7 6 5 4 3 2 1
Printed on acid-free paper
Typeset in Minion
Composition by R. Lynn Rivenbark
Macon, Georgia
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Contents
Foreword vii
Joshua Aizenman
Acknowledgments xi
1 The Puzzle 1
Carol Wise, Leslie Elliott Armijo, and Saori N. Katada
2 Chinese Financial Statecraft and the Response to the
Global Financial Crisis 25
Shaun Breslin
3 Korea’s Victory over the Global Financial Crisis
of 2008–09 48
Barbara Stallings
4 India’s Response to the Global Financial Crisis:
From Quick Rebound to Protracted Slowdown? 74
John Echeverri-Gent
5 Southeast Asia’s Post-Crisis Recovery:
So Far, So Good 102
Mark Beeson
6 The Global Financial Crisis and
Latin American Economies 123
Eric Hershberg
v
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vi Contents
7 Macroprudence versus Macroprofligacy:
Brazil, Argentina, and the Global Financial Crisis 148
Carol Wise and Maria Antonietta Del Tedesco Lins
8 Mexico’s Recovery from the Global Financial Crisis 181
Gerardo Esquivel
9 Lessons from the Country Case Studies 202
Leslie Elliott Armijo, Carol Wise, and Saori N. Katada
Contributors 231
Index 233
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joshua aizenman
Foreword
E
merging economies suffered a string of severe macroeconomic crises
between 1994 and 2001, starting with Mexico (1994) and East Asia (1997) and
continuing with Russia (1998), Brazil (1998–99), Argentina (2000–01), and
Turkey (2000–01). Those crises coincided with a period of growing external
financial integration. In spite of the reforms subsequently undertaken by
emerging economies, few would have predicted that they would perform as
well as they did during the 2008–09 global financial crisis and the accompa-
nying Great Recession.1 Not only did developing countries and emerging
economies display considerable resilience during the 2008–09 crisis but their
economic take-off—including that of the most populous countries, China
and India—also resulted in a situation in which more than half of global GDP
growth had originated in these countries by 2010 (at purchasing power par-
ity exchange rates). This volume provides an insightful overview and evalua-
tion of their remarkable performance during and after the global financial
crisis by methodically studying the diverse experiences of China, Korea, India,
the Southeast Asian countries, Argentina, Brazil, and Mexico. It distills those
experiences into a comprehensive analysis and presents the lessons learned
from the surprising resilience of emerging economies.
The analysis concludes that the market structural reforms of earlier decades
provided the fiscal and monetary space that enabled emerging economies to
invoke robust countercyclical expansionary macroeconomic policies in
response to the global economic crisis. Remarkably, the countercyclical
response of several of those economies exhibited an agility and a flexibility
that exceeded that of the responses of the OECD countries. The lessons that
vii
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viii Foreword
the emerging economies had learned from the financial crises of the mid-
1990s paid off: they aimed at greater exchange rate flexibility buffered by a siz-
able buildup of international reserves and improved their balance sheet
exposure. Those measures increased their resilience, reducing their vulnera-
bility to financial crises and the need to rely on costly and possibly destabi-
lizing bailouts from international financial institutions.
The introduction and the concluding chapters provide an insightful and
balanced analysis of the various responses of the emerging markets to the
global financial crisis. A key lesson is that strategies aimed at emulating the
golden mean—combining neoliberal with heterodox insights—paid off. Prior
neoliberal macroeconomic reforms were helpful overall in providing policy
space, but they were not a panacea. Defensive strategies, including precau-
tionary hoarding of reserves and reducing balance sheet exposure, helped in
times of peril (although countries should beware of the adverse effects and
costs of over-insuring themselves). Trade liberalization promotes growth and
trade diversification can reduce vulnerability, but neither by itself may succeed
in decoupling emerging markets from global turbulence. Countervailing
international conditions like high commodity prices helped Latin American
and other commodity exporters, though those gains came with costs to large
Asian importers (China, India, South Korea, and others). Low interest rates in
financial centers helped emerging economies, but they came with greater
exposure to destabilizing hot money inflows, with investors chasing yields, and
possibly to increasing balance sheet exposure. Applying pragmatic approaches,
learning from past mistakes, and investing in policy space and institutions
have all been key factors in the resilience of emerging economies. Narrow ide-
ological divides notwithstanding, countries that invested in flexibility and
better institutions and buffers gained resilience.
Put in historical context, the global financial crisis has been especially
“shocking.” Observers dubbed the 1985–2006 period the Great Moderation of
the OECD countries. Some credited the Great Moderation to the “good
macroeconomic policies” and “mature institutions” of the OECD bloc. The
Great Moderation proved to be illusory, and the consequent drop in interest
rates, inflation rates, and the price of risk put fiscal issues on the back burner
of the United States, the Eurozone, and other OECD countries in the late
w1990s and early years of the 2000s. Yet there has been no great moderation
for emerging economies—their experience with the massive financial shocks
of the 1990s brought painful learning and adaptation of new policies. The
global financial crisis vividly showed that volatility is back, ending hope that
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Foreword ix
the Great Moderation of earlier decades reflected enduring gains from better
macroeconomic policies. The crisis also illustrated that the financial global-
ization and financial deregulation of the 1990s and early years of the 2000s
overshot the desirable levels. Instead of helping countries cope with global
volatility, financial deepening became a growing source of instability, threat-
ening the globalization project. The global crisis also challenged earlier views
that held that “crony capitalism” in emerging markets was the source of their
exposure to financial instability and crisis, in contrast to the OECD countries,
with their more mature institutions and superior macroeconomic policies.
Well, not anymore—all countries are facing similar challenges in dealing with
and “taming the beast” of financial globalization.
This book should guide uswell in the coming years, providing a balanced
analysis of the successes and challenges facing emerging economies. While
most avoided repeating the old patterns (“When the United States sneezes,
emerging economies catch pneumonia”), it would be a mistake for them to
rest on their laurels. Past performance does not guarantee future results.
Emerging economies benefited from their lower financial exposure to trou-
bled U.S. assets, especially in countries run by prudent central bankers who
prohibited sizable exposure to U.S. collateralized mortgage obligations and
similar securitized assets. Yet the experience of South Korea illustrates the
limits of buffers: South Korea found that its sizable and once highly regarded
stock of international reserves failed to isolate its economy from massive
deleveraging. The ensuing financial panic was ultimately abated only with
the help of the U.S. Federal Reserve’s special swap lines.
Korea’s experience illustrates the need to supplement reserve hoarding with
prudential regulations dealing with the balance-sheet exposure of systemic
banking. Indeed, unlike the 1997–98 Korean financial crisis, the global finan-
cial crisis did not lead to a large post-crisis increase in the ratio of Korea’s
reserves to GDP but to prudential regulatory changes.2 Also, because the
United States and other OECD countries no longer act as “demanders of last
resort,” the post-crisis world has also been less friendly to export-led growth
strategies. That, in turn, has induced China to rebalance, giving priority to its
need to develop a more mature and vibrant level of domestic demand for
Chinese goods and services. Despite their robust performance during the cri-
sis, emerging economies experienced an overall drop in their growth. If the
secular stagnation hypothesis rejuvenated by Larry Summers should hold
over the next decade or two,3the convergence of emerging markets toward
OECD indicators will slow down, increasing the risk that these economies will
