Emerging Market response to Developed
Countries over recent periods of US
recessions and crises: What changed?
Regan Deonanan
University of Notre Dame
Thursday, 23rd June, 2011
1
Why 2007 US crisis of particular concern to Macroeconomists?
 Three large facts:
 Global nature of this US ‘recession’
 Largest downturn since Great Depression
 Macroeconomic models did not predict it
 Implication:
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Contrary to previous belief, we still don’t know how to prevent them
2
Purpose of my research
 How do we prevent developing countries from being so affected by
global crises?
 Need to understand what’s different about the 2007 crisis and why
3
Definitions
 Emerging markets (EMs) – countries in the process of rapid growth

Examples: BRIC, Indonesia, Mexico, Poland
 Developed countries (DCs) – countries with high level of development

Examples: Canada, France, Germany, Italy, Japan, UK, US (G7)
 US recessions/crisis: 1981, 1990, 2001, 2007
4
Big picture from the data:
Pair-wise correlations of rgdp growth between EMs and DCs
5
Main point from graph
 EM growth became highly synchronized with DC growth/shocks in
moving from 2001 to 2007 period – why?
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Framework of empirical methodology

Assumptions:
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DC fluctuations are the most important drivers of EM growth rates
EMs do not influence DC behavior
EM growth = US shock + Other DC shock + Prior EM growth + EM shocks
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Intuition behind empirical methodology
 What’s driving this recent change in EM response?
 Size of shocks from DCs
 Structural change within EM economy
 What is the nature of the structural change?
 Trade related
 Financially related
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Results: Size shocks or structural change?
Col
2005q3
2006q3
2007q3
2008q3
2
0
-2
-1
-4
0
-2
1
0
2
4
2
3
6
Chi
4
Bra
2009q3
time
BRA_Orig
BRA_Shock
2005q3
BRA_Effect
2006q3
2007q3
2008q3
2009q3
2005q3
2006q3
time
2008q3
2009q3
Per
-2
-2
-6
-4
0
0
-2
0
2
2
2
4
4
Mor
4
Mex
2007q3
time
2005q3
2006q3
2007q3
time
2008q3
2009q3
2005q3
2006q3
2007q3
time
2008q3
2009q3
2005q3
2006q3
2007q3
2008q3
2009q3
time
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Results: Ranking by level of structural change
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1. LATVIA
2. LITHUANIA
3. ESTONIA
4. RUSSIA
5. SLOVAKIA
6. ROMANIA
7. MALAYSIA
8. KOREA
9. MEXICO
10. ARGENTINA
11. THAILAND
12. PERU
13. TURKEY
14. JORDAN
15. CZECHOSLOVAKIA
16. BRAZIL
17. CHILE
18. HUNDURAS
19. POLAND
20. SOUTH AFRICA
21. MOROCCO
22. COLUMBIA
23. INDONESIA
24. ISRAEL
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Overall results
 Structural change within EM economies played a greater role in
explaining the change in behavior observed
 This structural change was particularly oriented towards the US
 This structural change left EMs more vulnerable to the US through
trade and not through financial channels
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Takeaway: EM response to DCs over various US
recessions/crises– what changed?

Whenever the US economy goes down we can expect EM economies to
also go down at the same time
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Implications
 Important from portfolio diversification viewpoint
 If investing in EMs for high growth - fine
 If motive for investing in EMs is balancing risk from investments in DCs,
need to look to other countries
 Important from macroeconomic stabilization viewpoint
 As we seek to diversify our economies by going after EMs, need to ensure
we develop relationships with other developing countries as a means of
insuring away aggregate risk
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Diversification and opportunities for growth of region
 International investors will now be looking beyond EMs for investment
opportunities
 Natural progression will be to Frontier Markets, some of which can be
found here in our region (eg. Jamaica, T&T)
 Making Caribbean region for financially attractive has the potential,
more than ever before, to bring in much needed investment
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