The Financial Crisis and its Impact on Developing Countries

The paper identifies three mechanisms that play a key role in spreading the consequences of the financial crisis to the developing world: remittances, capital flows and trade. The policy responses take Millenium Development Goals achievement and poverty reduction as the central policy concerns. The paper indicates that a fair number of countries have policy space to protect vulnerable groups in the short run as well as to undertake investments to build resilience and reach these goals in the longer term. Other countries will need additional development assistance to protect development achievements. The authors point to a number of factors that need to be taken into account in determining what mix of policies to deploy including the macroeconomic, fiscal and policy stance of countries and their dynamics. The paper also proposes far-reaching reforms to address the global financial crisis, which would help to put the global macroeconomic, fiscal and financial coordination mechanisms on a firmer footing.