The Student Becomes the Master in Managing Economic Crisis

The results are in: Developing countries were much better prepared to handle the downturn than the advanced economies of the first world

The analysis compared the economic governance of 14 countries and how they responded to the crisis. Emerging nations such as Brazil, India, China and Russia “got it right,” the study showed, while powers such as the United States, United Kingdom, Germany and Sweden lagged.

One of the study’s principal authors, Political Science Professor Sebastian Heilmann of the University of Trier, discussed the implications during the Bertelsmann Foundation’s second annual conference on the financial crisis. Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center in Washington, provided commentary from one of the “winning” countries, while Financial Times Associate Editor Paul Murphy moderated.
 
The sophistication of a country’s financial markets is directly related to how it performed in crisis, the study found.

“The reckless risk-taking that we found in the advanced political economies was not” in developing nations, Heilmann said, so they were less exposed to economic damage.
While the study praised the quick responses of all nations to right-size their economies through various stimulus packages to head off panic and bank runs, emerging countries in particular already had controls in place that prevented the crisis from getting as bad as it did elsewhere.

That’s because they’ve been tested before.

In the 1990s, for instance, “Brazil faced a very serious economic crisis, requiring economic stability,” Sotero said. “In Brazil today, you have no financial asset that is not regulated.”

Coming into 2008, he explained, “Brazil was ready. Brazil was in a good fiscal situation. We were not exposed because we learned a very hard financial lesson in the 1990s.”

Emerging countries have thus been called upon within the G20 to offer ideas on how to reform the system and better regulate financial markets, Sotero added.

The crisis response of many advanced economies “indicates striking loss in global credibility of the Anglo-American model of financial market-driven capitalism,” the study summary noted.
Those governments treated the symptoms and not the disease. Most countries issued short-term stimulus programs instead of investing in long-term stability.

The nations that addressed long-term structural issues in their economies will excel, Heilmann said. China, for example, has invested heavily in green technologies. South Korea has aggressively pursued improvements in education. Indonesia has created programs to fight poverty.

Such preventive moves tend to create widespread public support because people feel like recovery programs help them and not just the big financial institutions.
 
“The linkage between crisis prevention, political credibility and popular support is underrated by most policymakers,” Heilmann said.

The study called for “smarter policy tools” to contain future crises, such as better diagnosis of asset bubbles and more effective control of asset management.

The political clout of the financial industries in most advanced economies can be an obstacle to those goals, Heilmann noted, and that’s another area where developing nations come out ahead. “Keeping the financial industry at its right size politically is a very serious issue among emerging countries.”