Friday, October 10, 2008

When economic isolation doesn't seem so bad

In recent years, most (not all) mainstream economists have argued that developing countries do best when they are integrated into the global economy to the greatest extent possible. That might have been true when the global economy was, after a fashion, working. Now that the global economy is in crisis, however, the advantages of not being fully integrated are becoming apparent. An interesting article in the Wash Post today, somewhat provocatively titled "The End of American Capitalism?," includes the following passage in which the head of the IMF notes that African countries are relatively insulated from the most damaging effects of the crisis by virtue of their comparative lack of exposure to the world economy:
"'Obviously the crisis comes from an important regulatory and supervisory failure in advanced countries . . . and a failure in market discipline mechanisms,' Dominique Strauss-Kahn, the IMF's managing director, said yesterday before the fund's annual meeting in Washington.

"In a slideshow presentation, Strauss-Kahn illustrated the global impact of the financial crisis. Countries in Africa, including many of those with some of the lowest levels of market and financial integration and openness, are now set to weather the crisis with the least amount of turbulence."

Of course, there are virtually no truly autarkic economies, so all will be affected, but it's a matter of degree. There are other interesting passages in this article, but I'll let readers ferret them out for themselves.

p.s. What the article says about China is particularly worth noting. See also this post from D. Rodrik.


Nick said...

The other consideration, however, is that African countries are also closed off from the wealth creating centres of the world economy. Whether this is good or bad depends on your views on whether intense interaction between metropoles and peripheries helps or harms the latter.

Brazil also looks likely to continue to do okay for itself despite the credit crunch. Its economy is engaged in the world economy but is reasonably self-sufficient. It has also been running massive interest rates over the last few years to kill inflation, so credit is tight and few are exposed.

LFC said...

Interesting points on Brazil -- thanks.