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Cambridge Journal of Economics 2009 33(4):685-702; doi:10.1093/cje/bep029
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© The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

This article appears in the following Cambridge Journal of Economics issue: Special Issue: The Global Financial Crisis [View the issue table of contents]

A developing country view of the current global crisis: what should not be forgotten and what should be done

Roberto Frenkel and Martin Rapetti*

* CEDES and University of Buenos Aires, Argentina (RF) and CEDES and University of Massachusetts, Amherst (MR)

Address for correspondence: Roberto Frenkel, Centro de Estudios de Estado y Sociedad (CEDES), Sanchez de Bustamante 27, Buenos Aires C1173AAA, Argentina; email: frenkel{at}cedes.org

Macroeconomic theory will surely be affected by the current global crisis. There are signs that some ‘old’ theories and insights will have a comeback. This paper argues that among them economists should not forget the lessons that have been learnt from three decades of several financial crises in developing countries. We emphasise two important lessons. First, preventing crises in developing countries requires not only the regulation of domestic financial systems, but also a consistent set of macroeconomic policies. In particular we stress the need for consistency between the exchange rate rule, the capital account regime and the domestic financial market regulations. Second, financial crises in developing countries tend to worsen both the balance of payments and the fiscal balance. Traditional adjustment policies tend to exacerbate the recessive trends in output and employment. This is just the opposite of what is required and what governments in developed countries are able to do. Developing countries should push for an agenda that helps them deal with these problems.

Key Words: Financial crises • Developing countries • Minsky

JEL classifications: G01, F32, F53

Manuscript received March 25, 2009; final version received May 6, 2009.


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