When the global financial crisis struck, the purveyors of conventional wisdom had it all figured out. Latin American countries would surely mismanage the crisis, as they have in the past. Economies that established partnerships with developed countries could rely on that “insurance” against instability. The growth rate of East Asian economies would not dip below the rates reached in previous decades. And the growth rate of economies, such as Ireland’s, which had enjoyed a “good boom” prior to the crisis, would rebound quickly and relatively painlessly.
Not one of these predictions came to pass.
Indeed, one of the striking aspects of the global financial crisis is how often the facts have contradicted what, according to conventional wisdom, was expected to happen.
- Most Latin American countries learned lessons from past financial crises and established economic stability through sound macroeconomic policies. As a result, the downturn there lasted only fifteen months, and Latin American economies are expected to grow by 5 percent a year—faster than advanced economies.
- Countries such as the Baltic states, which joined the EU in the 1990s, discovered that their embrace of its economic rules and reforms offered little protection from the crisis. Their economies suffered far more than those in Poland and the Czech Republic, which took a more gradual approach to partnership.
- Middle-income economies in East Asia, despite assumptions that because they weathered the crisis so well they would continue to have high growth, have been losing competitiveness in both directions: Low-income economies in the region, with their cheaper labor, have cornered the market on low-tech products, while the developed economies, with their advanced knowledge and skills, dominate the high-tech end. Foreign direct investment, public investment, and private investment have all decreased in the middle-income economies, making growth rates of over 6 percent a year in Malaysia and Thailand far from certain.
- Countries considered models in their transition to advanced economies, like Ireland and Spain, were thought to be immune from the most damaging effects of a global economic crisis. But just the opposite occurred. In Ireland, many observers were misled by the country’s two booms: a “good boom” based on sound economic fundamentals, and a “bad boom” following its adaption of the euro.
Another prediction—that people will withdraw support from governing coalitions that react to the crisis by responding to markets rather than voters—may or may not prove to be wrong. Only time will tell.