Institute of Development Studies

In September 2008, the world’s economy stalled. The world realised the extent of the potential damage caused by the US sub-prime mortgage crisis and bank lending collapsed, ushering in the sharpest and deepest global recession for over 70 years. Since then, there has been an outpouring of analysis and debate, initially focusing on US and EU economies and rescuing the banking sectors from total collapse. Governments and Central Banks took unprecedented steps to provide emergency relief to banks, effectively socialising potential liabilities of the banking sector. Attention then turned to numerous initiatives to reform both regulatory systems. Developing countries were almost totally absent from this debate. It was suggested that the impact of the crisis might be limited on low-income countries since their banking systems are small and had no involvement with the sophisticated financial instruments that wreaked such havoc in the USA. However, during the spectacular crashes of stock markets and exchange rates in major emerging markets it became clear that this would be a global crisis with important spillover effects for all developing countries. How then will the global financial crisis affect developing countries and what should policy responses be? To address the development dimensions of the current crisis, IDS undertook a set of rapid research projects between December 2008 and April 2009 exploring specific channels through which the crisis is affecting developing countries and the characteristics of potential policy responses. This IDS Bulletin presents the results of these research projects – among the first to provide detailed field-based evidence on the impacts of the crisis. FORTHCOMING SEPTEMBER 2009.