Institute of Development Studies

Global financial turmoil: Five lessons from developing country crises

18 August 2011

Global financial markets have arguably experienced the most volatile few weeks in their history. Earlier this month ratings agency Standard & Poor's downgraded US debt from the gold-standard Triple-A, and one bailout after another has been implemented in the Eurozone.

But for those who have studied financial crises in developing countries, this all seems rather familiar, according to IDS Research Fellow Stephen Spratt.

In his latest post on the Globalisation and Development blog, Dr Spratt outlines five key lessons from developing country crises that policymakers might want to consider.

Using examples from Argentina, Malaysia, Thailand and others, Dr Spratt recommends:

1. Governments need to impose a reduction of debts to sustainable levels - this means the private sector accepting major losses.
2. Direct controls on market activity to short-circuit destructive speculation in a crisis can be both necessary and effective.
3. Counter-cyclical mechanisms need to be hard-wired into financial systems to counter the formation of bubbles. This needs to be done now, not when a new bubble is forming when it will already be too late.
4. Italy needs to roll over debt equivalent to a quarter of its GDP in the next year and other European countries are in a similar position. Lengthening maturities, and preventing a new wave of short-term borrowing, needs to be a core part of restructuring and reform.
5. Countries need to do what is necessary to make an economic system work, or design a new system that they can make work. Muddling through is not an option.

While there are many similarities between the current turmoil and developing country crises, Dr Spratt explains that there are also big differences. He writes: 'In particular, developing countries have often been on the receiving end of forces they could do nothing about...In Europe and the United States this is not the case. As well as getting their own houses in order politically and economically, they are also in a position to reshape global financial markets and make crises the exception rather than the norm.'

Read Stephen Spratt's full post on the Globalisation and Development Blog.

About the Globalisation and Development blog

The Globalisation and Development blog is written by experts from the Globalisation Team at the Institute of Development Studies (IDS), UK.

The blog features comment and opinion on the core themes of business; climate change; and trade, investment and growth. We welcome views, questions and feedback, so do let us know what you think and join the conversation.

Sign up to receive new posts from the Globalisation and Development blog by email.