The Impact of the Crisis on Semi-Industrialised Countries

by WILLIAMSON, J., 2009
Research Report. Centre for Poverty Employment and Growth, Human Sciences Research Council

Williamson considers the channels through which the global financial crisis affects the real economy. There are two basic mechanisms through which a recession can be transmitted to a country from abroad. One is through trade or some other form of current account receipts. The second is through the financial markets. Other forms of transmission are derivative, such as a decline in reserves. The characteristics of the current recession suggest that most countries can be expected to suffer a recession through both the trade and the financial channel. The effects of smaller exports can only be expected to play in gradually, whereas the effects operating through the financial markets are likely to emerge suddenly. Emerging markets have suffered through the financial markets as an indirect consequence of disturbances in developed-country financial markets. It will only be possible to look for a contribution to recovery from trade if a country is also prepared to accept a depreciation of the exchange rate. Other countries will either have to expand internal demand or wait for the rising tide to lift them (somewhat after others who are able and willing to do their share of expanding internal demand).