WASHINGTON, November 22—As the world slowly recovers from the deepest global recession since the 1930s, countries have yet to enact the politically tough structural reforms that are needed. In a new policy brief, Uri Dadush and Vera Eidelman identify the five big surprises of the Great Recession and warn that policy makers are failing to draw the necessary lessons from these surprises, leaving the world economy vulnerable to similar crises in the future.
Five Surprises of the Great Recession:
- Output collapsed. The speed and global reach of the collapse demonstrated that globalization can greatly amplify shocks—no country is safe. While the previous focus of financial reform was on developing countries, the crisis underscored the urgency of changes in advanced countries.
- The United States suffered a milder than expected recession despite being at the epicenter of the crisis. The American economy was hit hard by the crisis, but saw its output decline less and recover faster than other advanced economies. Though the government’s stimulus and bank rescues correctly receive credit, America’s vigorous private sector response has not been sufficiently recognized.
- Europe experienced the most severe downturn. Even though the crisis did not originate in Europe, its profound vulnerabilities were quickly exposed, most notably—and unexpected before the crisis hit—the large divergences in competitiveness and fiscal soundness within the euro zone. The region’s rigid labor and product markets greatly complicated the task of adjusting to the shock.
- China defied gravity. Even though the Chinese economy is greatly dependent on exports, which were hit hardest by the crisis, China’s growth quickly recovered to extraordinary levels. Its huge stimulus package, however, exacted a heavy price on government finances and distorted the economy. The crisis showed that China’s over-reliance on exports carries great risks.
- Latin America showed remarkable resilience. Latin America, a region with severe structural and competitive handicaps, has been disproportionately affected by global downturns and financial panics in the past. Its ability to shrug off the global crisis demonstrates that sound macroeconomic management and solid balance sheets can greatly mitigate the effect of shocks.
"While governments reacted quickly and appropriately with stimulus measures and bank rescues to prevent a descent into depression, they unfortunately have not acted forcefully enough on these lessons," write the authors. "In particular, leaders have failed to enact the structural and regulatory reforms needed to protect the world against the next crisis."
Uri Dadush is senior associate and director in Carnegie's International Economics Program. His work currently focuses on trends in the global economy, the global financial crisis, and the euro crisis. Dadush previously served as the World Bank’s director of international trade and director of economic policy. He has also served concurrently as the director of the Bank’s world economy group. Prior to joining the World Bank, he was president and CEO of the Economist Intelligence Unit and Business International.
Vera Eidelman is managing editor of the International Economic Bulletin. She holds bachelor's degrees in economics and sociology from Stanford University.
The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, and draws out policy implications. The current focus of the Program is the global financial crisis and the policy issues raised. Among other research, the Program examines the ramifications of the rising weight of developing countries in the global economy.
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