Last month I speculated about the effects that the subprime crisis might have on developing countries in a post called Creative destruction on Wall Street. What lessons would emerging markets take from government interventions in the U.S. and Europe? Bill Easterly picks up where I left off in a recent article arguing that Development Doesn't Require Big Government. Easterly concludes that:
[W]e do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor.
To the issue of increased government regulation of the economy, we we can add a few other effects of the subprime crisis. First is that remittances will take a hit. The Economist Intelligence Unit reports on what this means for Latin America:
According to estimates by the Inter-American Development Bank’s (IDB) Multilateral Investment Fund, total remittances from migrants will grow at an extremely slow pace this year—indeed the slowest since the IDB began monitoring such flows in 2000. The bank forecasts that inflows will be US$67.5bn, a nominal increase of barely 1.5% over the US$66.5bn sent in 2007. If adjusted for inflation, this represents a contraction of 1.7%.
Second, some commodity prices could see serious declines, resulting in a negative shock for commodity-exporting countries. This could be a double whammy for countries that rely on both commodity exports and remittance receipts. A large decline in commodity prices is still an uncertain prospect, though, as major emerging markets could help prop up demand. So far, a World Bank index of commodity prices for low and middle income countries indicates that although prices are falling, quarterly averages for 2008 are still well above those from a year ago.
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