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How Can the Crisis Vulnerability of Emerging Economies Be Reduced?

Author

Listed:
  • Klaus Abberger
  • Biswa Nath Bhattacharyay
  • Chang Woon Nam
  • Gernot Nerb
  • Siegfried Schönherr
Abstract
Emerging countries in many cases are more crisis-prone than highly developed industrialized countries. This is in many cases due to a weak or volatile financial sector. The best policy to strengthen crisis resistance is the building up of a sound financial position. A sound financial position of a country also increases the capacities to get out of a crisis. For getting out of a crisis, however, an important additional general condition must be fulfilled: the economy must increase its international competitiveness to assure growth, the only way out of a crisis. Building up a sound financial position and a competitive private sector, therefore, should be a pre-crisis policy. It relates to the public sector as well as the financial institutions. Once a crisis has erupted in an unsound financial environment there is no chance to escape a crisis sustainably avoiding a painful process. The blueprint for getting out of a crisis suggests a complex policy approach. The private financial sector must undergo structural reforms (in reality closing down or downscaling unsound institutions) and the government must apply fiscal austerity measures to reduce public debt, regaining credibility and by this creating new fiscal options for counteracting crisis effects. Labour costs can be reduced by increasing the labour market flexibility (e.g. by easier hiring and firing and higher wage spreads especially towards the lower wage scale) and by measures directly reducing labour costs. The result of such measures will be an increase of unemployment and of felt unemployment risks by large population groups as well as general real income losses from labour. The fiscal austerity measures in addition and in short term will reduce economic activities and thus aggravate the social problems. These negative social effects of getting out of a crisis are the most crucial and controversial policy issue. People and their interest organizations to a greatly varying extent will accept or refuse

Suggested Citation

  • Klaus Abberger & Biswa Nath Bhattacharyay & Chang Woon Nam & Gernot Nerb & Siegfried Schönherr, 2014. "How Can the Crisis Vulnerability of Emerging Economies Be Reduced?," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 65.
    • Handle: RePEc:ces:ifofob:65
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G01 - Financial Economics - - General - - - Financial Crises
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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