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Journal of International Development J. Int. Dev. 24, 673–685 (2012) Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jid.2860

GLOBAL FINANCIAL AND ECONOMIC CRISIS: EXPLORING THE RESILIENCE OF THE LEAST DEVELOPED COUNTRIES DEBAPRIYA BHATTACHARYA and SHOURO DASGUPTA* Centre for Policy Dialogue, Dhaka, Bangladesh

Abstract: It is often argued that strong macroeconomic fundamentals along with weak integration with international financial markets acted as major buffers for least developed countries (LDCs) against fallouts of the recent global financial and economic crisis. This paper examines the hypothesis that LDCs had strong macroeconomic fundamentals in the wake of the crisis by studying Impulse Response Functions (IRFs) of Gross Domestic Product per capita of the LDCs during the crisis. With the treatment of the crisis as a transmission of shocks and utilisation of IRFs, the paper finds substantial and rather persistent output and growth loss for LDCs because of fall in external demand and terms of trade shocks. With the forecast of the impacts of a potential ‘double-dip’ recession on the LDCs by using Vector Autoregressive, the paper concludes that LDCs would require the greater part of the decade to recover which is lower than the earlier recovery period. Copyright © 2012 John Wiley & Sons, Ltd. Keywords: global crisis; least developed countries; Impulse Response Functions; Bangladesh JEL Classification: C23; E17; G01; Q02

1

INTRODUCTION

The recent global financial crisis precipitated the sharpest drop in global economic activity of the modern era. The fallout for global trade—both for volumes and the pattern of trade—had been dramatic.1 In 2008, major developed economies found themselves in a recession, and among the developing countries, those with globally integrated financial sectors rapidly experienced the aftershocks from global financial centres (Green et al., 2010). *Correspondence to: Shouro Dasgupta, Centre for Policy Dialogue, Dhaka, Bangladesh. E-mail: [email protected] 1

World merchandise trade experienced an unprecedented decline of 23 percent in 2009, falling to USD 12.1 trillion compared with USD 16.1 trillion in 2008 (WTO, 2010).

Copyright © 2012 John Wiley & Sons, Ltd.

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D. Bhattacharya and S. Dasgupta

The initial impact of the global economic and financial crisis on the least developed countries (LDCs)2 was less pronounced. This was partly because the LDCs are not as integrated into the global financial markets as some of the developed and some emerging economies. However, with the deepening of the financial crisis, fall in demand for export, freezing of credit and sharp fall in the market value of private wealth, the financial crisis started to affect the LDCs (Karshenas, 2009). In this connection, the present paper has essentially three objectives. First, it attempts to model the impact of the recent economic and financial crisis by treating the crisis as a shock, i.e. an event on which the LDCs had no influence. Second, it seeks to examine the hypothesis that strong macroeconomic fundamentals along with weak integration with international financial markets acted as major buffers for the LDCs against the negative fallouts of the recent global financial and economic crisis. This has been carried out by studying Impulse Response Functions (IRF) of major macroeconomic variables, viz. Gross Domestic Product (GDP) per capita and export growth of the LDCs. Third, the paper tries to forecast the possible impact of a probable second dip of the global economy on the LDCs. The paper takes note of the state of knowledge in the concerned field of analysis. The database for the executed econometric analyses has been constructed, drawing on various international sources. The paper has been structured in line with objectives of the research, as mentioned previously. A set of policy perspectives has been offered in the concluding section of the paper.

2 METHODOLOGY AND DATA Modelling the impact of the global financial crisis involves a number of critical aspects. A review of the emerging empirical literature on the subject indicates that periods of severe growth slowdown are more common than previously thought. The implications of such economic downturn are crucial for understanding the medium to long-run growth process, especially in developing countries. Related literature shows that countries with stagnation of real income stagnation over period were more likely to be poor (e.g. Reddy and Minoiu, 2009). Moreover, crises can result in sharp declines in investment in education and health, declines that can potentially have long-lasting effects (Benhabib and Spiegel, 1994; Krueger and Lindahl, 2001). There is also an extensive theoretical literature that explores the possibility of growth non-linearities that may result in countries falling into prolonged periods of underdevelopment, commonly known as poverty traps. Eichengreen et al. (1995) suggested in industrial countries that major determinants of currency crises include capital controls, past government deficits, past and future inflation, future GDP, employment growth and past current account balances. IMF (1998) and Frankel and Rose (1996) indicated that external factors such as terms of trade (TOT) and monetary policy of large economies may cause currency crashes and capital flight. With regards to association between macroeconomic fundamentals and economic crisis prevention, Deb (2005) contended that they are not interrelated. Whereas, Park and Lee 2

LDCs are one of the most disadvantaged groups of countries characterised by low per capita income, underdeveloped human assets and high economic vulnerability. Currently, this United Nation-designated category consists of 48 countries, of which 33 are in Africa, 14 in Asia and Haiti. For details see http://www.unohrlls.org.


J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid

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(2001) showed that depreciating real exchange rates, expansionary fiscal and monetary policy along with global growth are required for recovery. To assess the role of external factors on output, in the present study, a GDP index has been constructed, on the basis of available data that is a simple average of indices corresponding to the LDCs. A simple average, instead of a weighted average, is used to avoid overrepresentation of bigger countries, as the goal is to assess performance of an average LDC. Augmented Dickey–Fuller tests and Phillips–Perron tests are used to test unit roots, whereas Akaike Information Criterion and Bayesian Information Criterion have been used to select the lowest information criterion. Standard optimal lag length tests were used to select lag lengths.

2.1

Impulse Response Functions

As is known, an IRF traces out the response of a variable of interest to an exogenous shock (Sims, 1980). Even in the vast majority of applications, the exogenous shock is unobservable because it is a linear combination of unobservable regression disturbances. In the study, an attempt has been made to trace out the impact of the crisis, which is the exogenous shock by using a simple dummy variable approach using an autoregressive model of GDP growth rates augmented by crisis dummies, as in the study of Cerra and Saxena (2008). This allows us to observe the response functions of loss in GDP growth of the LDCs from external demand (ED) and TOT shocks. The ED and TOT were chosen because most developing and low-income countries were primarily hit by either external demand effect, although some, notably fuel exporters, were also hit by a TOT and perhaps at a lesser extent, a foreign direct investment (FDI) effect (IMF, 2009). For this paper, we use a modified version of the model of Berg et al. (2010). To assess the performance of the model, an impulse response analysis has been conducted to explore the LDC GDP behaviour to shocks in external variables. A Vector Autoregressive model was also estimated, which accounts for non-stationarity and serial correlation in the data. We also use a 6-year Generalised Method of Moments (GMM) panel regression on 31 LDCs to study the impact of the ED and TOT shocks on GDP growth per capita, controlling for lagged output growth, debt-to-GDP ratio, real exchange rates, and country and year-specific fixed effects. In effect, we studied the relationship of external demand and TOT on GDP growth and export growth in LDCs for the period 2005–2010. Our interest in this paper is limited to within LDC indicators, and thus, non-LDC were not considered. Both Akaike Information Criterion and Bayesian Information Criterion suggest that the optimum number of lags for ED shock is 3, whereas the optimum for TOT shock is 2. No evidence was found to suggest the existence of unit roots.

3

IMPACT OF THE CRISIS ON THE LDCS

The crisis that began in September 2008 ultimately had a significant impact on the LDCs, especially on their economic growth and trade performance, although these impacts were relatively less severe than that felt by USA and the Euro Zone. Table 1 and Figure 1 depict that the LDC GDP growth rates plummeted in the face of the crisis—the aggregate growth rates dropped from 8.6 per cent in 2007 to 6.5 per cent in 2008, and subsequently to 4.6 per cent in 2009. Interestingly, the LDC economies bounced back in 2010, recording Copyright © 2012 John Wiley & Sons, Ltd.

J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid

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Table 1. Economic performance of the least developed countries (LDCs) around the crisis

Year

Real GDP growth (%)

Real GDP/capita growth (%)

GDP deflator (%)

Trade (% of GDP)

FDI Net inflows (billion USD)

2007 2008 2009 2010

8.6 6.5 4.6 5.7

5.6 4.1 2.3 3.4

7 10 5 8

61.85 62.63 57.08 55.40

14.86 17.20 17.12 27.40

Source: based on World Development Indicators (World Bank, 2011). GDP, Gross Domestic Product.

an improved growth rate of 5.7 per cent. However, this recovery remained below the pre-crisis trend. The per capita growth rate in the LDCs paralleled the GDP growth rates—falling between 2007 and 2009 and recovering in 2010 but remaining below the pre-crisis benchmark. Table 1 further reveals that the share of trade in LDC economies started to fall a year later (i.e. in 2009) and did not recover in 2010. Curiously, net inflow of FDI to the LDCs continued to show robust trend, notwithstanding the crisis. The crisis had a greater impact on the African LDCs with their GDP growth falling from 9.1 per cent in 2007 to 4.6 per cent in 2009. The Asian LDCs showed greater resilience as the GDP growth rate declined from 7.7 per cent in 2007 to 5.1 per cent in 2008.

3.1

Trade Performance

Prior to the crisis, the share of LDC trade in the world markets had been steadily rising. Because of the increases in the prices of oil and minerals, and thanks to preferential market access in the developing country markets, the share of LDCs in world merchandise trade in 2008 accounted for 1.1 per cent of world merchandise trade, up from 0.6 per cent in 2000 (WTO, 2009). However, as the major developed countries such as USA and the European Union started experiencing decline in their aggregate demand, exports from the LDCs also diminished. WTO estimates that between 2008 and 2009, LDCs’ merchandise exports fell by 26 per cent, i.e. from USD 176 billion to USD 126 billion (WTO Statistics database3). According to the ITC (2010), exports by LDCs to major partners decreased by 34 per cent in 2009. IMF estimated that the total income loss to the LDCs due to balance of payments shocks was to tune of USD 71.5 billion in 2009 (IMF, 2010) (Figure 2). The fall in export receipts by the LDCs was underpinned by slowdown in both exports of goods and services. Figure 3 shows that the growth in total (goods plus services) exports from the LDCs suffered a major drop in 2009, following years of sustained growth. As in the case of GDP growth rate, the LDCs’ total export growth recovered in the following year (2010), but below the pre-crisis trend. In comparison to the Asian LDCs, pre-crisis growth rate export of goods had been much higher in the African LDCs, and the fall was much deeper in 2009 (Figure 4). In 2010, Asian LDCs recovered partly, more thanks to the greater adaptability of their manufacturing sectors. However, both the regions equally suffered significant setbacks in terms of exports of services (Figure 5). 3

WTO Statistics Ddatabase: Trade Profiles: http://stat.wto.org/Home/WSDBHome.aspx


J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid

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6 4 2 0

LDC GDP Growth

8


1980

1990

2000

2010

Year Source: Based on World Development Indicators (World Bank, 2011)

Least developed country (LDC) Gross Domestic Product (GDP) growth rate. Source: Based on World Development Indicators (World Bank, 2011)

8 6

-5

2

4

Asian LDC GDP Growth

5 0

African LDC GDP Growth

10

10

Figure 1.

1980

1990

2000

Year

2010

1980

1990

2000

2010

Year

Source: Based on World Development Indicators (World Bank, 2011)

Figure 2. Gross Domestic Product (GDP) growth rate of Asian and African least developed countries (LDCs). Source: Based on World Development Indicators (World Bank, 2011)

Country experiences also bear out the aggregate trends in export performance of the LDCs during the crisis. Cambodia’s real GDP growth rate dropped from 9.0 per cent in 2007 to 3.8 per cent in 2009, the highest drop among Asian LDCs; Lao PDR’s growth rate declined to 5.9 per cent in 2009 from 16.4 per cent in 2007, and Bhutan’s annual average growth fell to 4.5 per cent in 2009 compared with 17.3 per cent in 2007.4 Among the African LDCs, Angola’s GDP growth rate decreased from 20.3 per cent in 2007 to 0.41 per cent in 2009, Equatorial Guinea’s GDP growth rate slumped to 5.3 per cent in 2009 from a high of 23.2 per cent in 2007, whereas Madagascar’s growth rate fell to 5.0 per cent in 2009 from 6.3 per cent in 2007. Only six of the 32 African LDCs’ GDP growth increased in real terms in 2009 compared with 2007. 4

UNCTADStat, United Nations. http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx?sCS_referer=&sCS_ ChosenLang=en


J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid


-40

-20

0

20

40

678

1980

1990

Year

LDC Goods Export Growth

2010

2000 LDC Service Export Growth


Growth rate of total exports (good and services) for least developed countries (LDCs). Source: Based on World Development Indicators (World Bank, 2011)

-40

-20

0

20

40

Figure 3.

1980

1990

2000

2010

Year African LDCs Goods Export Growth

Asian LDCs Goods Export Growth


Figure 4.

Growth rate of exports of goods: African and Asian least developed countries (LDCs). Source: Based on World Development Indicators (World Bank, 2011)

Bangladesh’s Merchandise Trade Index fell from 75.1 in 2007 to 63.7 in 2009, whereas the indices for Lao PDR and Yemen decreased to 103.9 (118.6 in 2007) and 131.7 (152.4 in 2007) in 2009, respectively. Among the African LDCs, Guinea’s index declined to 133.6 in 2009 from 179.0 in 2007, and Zambia’s index fell to 159.7 in 2009 compared with 196.5 in 2007. Values of Cambodia’s clothing exports went down by 16.1 per cent in 2009 compared with 2008 (from USD 3.1 billion in 2008 to USD 2.6 billion in 2009). In the case of Ethiopia, decline in wholesale market prices for cut flowers in the Netherlands meant that the country earned only USD 131 million of a projected USD 280 million from flower exports in FY2008-09.5 Foreign direct investment inflows to the 48 LDCs declined by 0.6 per cent in 2010 to USD 26 billion, following a 20 per cent fall a year earlier. Although FDI inflow to the LDC group as a whole increased around the crisis, the distribution of FDI flows among LDCs also remains highly uneven, with over 80 per cent of LDC FDI flows going to resource-rich economies in Africa (UNCTAD, 2011b). As such, in 2009, FDI inflows declined by more than 35 per cent compared with 2008 in the Central African Republic, the Democratic Republic of the Congo, Guinea, Timor-Leste, Mali, Mauritania, Sierra Leone and Yemen (UNCTAD, 2011a). In Zambia, the proportion of non-performing loans in total assets increased from 7 per cent to 13 per cent during 2009 (ODI, 2010). Although it is argued that LDCs had strong macroeconomic fundamentals leading to the crisis, the unprecedented period of economic growth during the years of 2000–2007 5

Trade Map, International Trade Centre, www.intracen.org/marketanalysis


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-10

0

10

20

30


1980

1990

Year

African LDC Service Growth

2000

2010

Asian LDC Service Growth


Figure 5. Growth rate of export of services: Africa and Asian least developed countries (LDCs). Source: Based on World Development Indicators (World Bank, 2011)

brought only limited structural improvements in the LDCs. For example, chronic shortfall of investment persisted as share of total investment, as percentage of GDP for the group grew marginally from 20 per cent (2000) to 23 per cent (2008). Indeed, gross fixed capital formation actually fell in 19 LDCs during the years of 2002–2007. Domestic savings in non-oil exporting LDCs, did remain constant at a very low level of 10 per cent of GDP. The manufacturing sector of the LDCs as a group accounted for 10 per cent of GDP in the period 2006–2008, i.e. remained at the same level as in the start of 2000. Twenty-seven LDCs experienced deindustrialisation (reflected in the declining share of manufacturing value added in their GDP) between 2000 and 2008 (UNCTAD, 2011a). According to Karshenas (2009), the economic crisis may have resulted in an additional 9.5 million people living in extreme poverty in the LDCs than would have been the case in the absence of a crisis. Whereas, the United Nations Conference on Trade and Development (UNCTAD) estimates that if poverty reduction rates over the next 5 years fall back to those of the 1990s, there could be 77 million more people living in extreme poverty in the LDCs by 2015 than if the poverty reduction rates of the period 2000–2007 were maintained (UNCTAD, 2010).

4 EXPLORING THE PRE-CRISIS STRENGTH OF MACROECONOMIC FUNDAMENTALS OF LDCS The results obtained from the IRFs and the GMM regressions are discussed as follows: • From the GMM regression, it was obtained that the economic and financial crises have had a significantly negative impact on the GDP growth of LDCs (5 per cent level of significance). The fall in FDI and the fluctuations in the exchange rates were the major drivers behind the declines in fortunes of the LDCs. • With the use of autoregressive models of output growth and IRFs, it was found that the impact of the external demand shock (due to the 2008 crisis) on GDP growth rate is negative and persistent for up to 5 years (Figure I in Technical Appendix). This suggests that the GDP growth trend is expected to remain below the pre-crisis trend for at least 5 years. • The ED shock on export demand is also negatively significant and as persistent as the external demand shocks on GDP growth. IRF in Figure II presented in the Technical Appendix suggests that it may take up to 5 years for the export growth rate of the LDCs to return to the pre-crisis trends. Copyright © 2012 John Wiley & Sons, Ltd.

J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid

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• As for the TOT shock, the impact on GDP growth rate is negative but is not as persistent as that of ED shock. The IRF in Figure III suggests that it might take up to 3 years for the loss in GDP (due to fall in TOT) to return to the pre-crisis trend. • The estimated coefficients of ED growth is positive and significant, indicating a positive impact on growth. Although the coefficient estimates on TOT are also significant at the 10 per cent level, the lagged change in FDI to GDP ratio is statistically insignificant (Technical Appendix: Table 1). • Expanding the GMM regression framework to include inter-action terms of the shocks with the debt-to-GDP ratio, we found consistent results with theory; the inter-acted term’s coefficient estimate is positive and significant. This suggests that accumulation of large debt-to-GDP ratios could amplify the effects of ED shocks on growth. • We also incorporated international reserves with ED shocks; results suggest that higher international reserves may help LDCs to counter the negative impacts of an ED shock. The downward sloping IRFs and the breaks in them suggest a loss in output of LDCs. Thus, it is implied that the notion of LDCs having strong macroeconomic fundamentals leading to crisis may not be valid. The IRF (Figure IV in Technical Appendix), representing output in the LDCs, is downward sloping even before the crisis, suggesting that the LDCs may have had weak macroeconomic fundamentals leading to the crisis (the crisis dummy changes from zero to one). However, the fact that there are only 2 years of post-crisis data somewhat undermines the estimates.

5 FORECASTING THE POSSIBLE IMPACT OF A DOUBLE-DIP RECESSION We use our Vector Autoregressive model with shocks to forecast the impact of a possible ‘double-dip recession’, i.e. possible impact of a probable second prolonged period of global recession. In this case, it is assumed that such shock impacting global output would start affecting in June 2011, and only forecast for an external demand shock on the GDP of LDCs. The IRF in Figure V (Technical Appendix) suggests that it would require almost 7 years for the LDCs to return to the pre-crisis trend if there were to be an external demand shock in June 2011. There exists considerable variation around the median change in the 7-year growth rate, with some countries topping their pre-crisis growth trends and others ending up with substantially lower growth.

6 CONCLUSION AND RECOMMENDATIONS The study indicates that the LDCs have been significantly affected by the recent global crisis of 2008 that they did not cause or influence. Analysis using IRFs suggests that the output loss due to the terms of trade and external demand shocks has been significant and persistent. Panel regression using Generalised Method of Moments also supports this conclusion. With the use of inter-action terms representing macroeconomic policy variables, the findings suggest that countries with high debt-to-GDP ratio and low international reserves were more vulnerable to the effects of the shock on GDP growth. The forecasts of a possible ‘double-dip’ recession, based on Vector Autoregressive functions, indicate that a second shock will have a much more prolonged effect on GDP growth of the LDCs. Copyright © 2012 John Wiley & Sons, Ltd.

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In the face of such freshly emerging global risks and recognising the low level of available fiscal space for pursuing counter-cyclical measures, it is reckoned that it will be prudent for the LDC governments to undertake pre-emptive measures, particularly concerning their macroeconomic fundamentals. Because results suggest that countries with volatile exchange rate regimes are more vulnerable to external shocks, the LDCs would be well advised to build-up their international reserves and make their exchange rate regimes more flexible. The LDCs would also need to strengthen their export diversification strategy—in terms of both products and markets. To spread the risks of future demand deficiencies for their exportables, the LDCs should emphasise on adding value to their primary products and tap more into the vibrant emerging markets. To ensure enhanced and sustained flow of remittance income, the LDCs would need to diversify the labour markets for expatriate workers. Indeed, fall in external demand and limited domestic resource mobilisation opportunities will keep the LDCs structurally vulnerable to shocks emanating from the systemic failure of global economy, to which they have not contributed. This makes the LDCs particularly entitled to internationally sourced crisis mitigation funds. More preferential market access for all products of all LDCs needs to be ensured in this respect. The fiscal consolidation in the LDCs, in anticipation of another spate of global crisis, has to be backed up by more domestic recourse mobilisation as well as efficient government investments for promoting productive capacities including physical infrastructure facilities. Indeed, such investments could be a part of a well-designed stimulus package. This could prop-up the domestic demand, partly off-setting the decline in external demand. There is a tendency of the governments including those in the LDCs to cut spending on education, health and social safety nets by way of austerity measures. These social sectors spend for needs to be maintained so that the disadvantaged groups are not pushed down to the poverty line further because of reduced livelihood opportunities along with higher consumer prices. Those countries that had austerity measures coupled with safety net programmes that managed to limit unemployment and prevented major economic damage could be a good example for the LDCs.6 Admittedly, there has always been substantial diversity in the response of countries’ growth to large negative shocks as it had been in 2008–2009. This also has to do with the heterogeneity of the countries, including the LDCs. In this connection, the policy perspectives presented here may be considered too broad. For more contextualised policy recommendations, one would need to do time series analysis with country-specific data.

REFERENCES Benhabib J, Spiegel, M. 1994. The role of human capital in economic development: evidence from cross-country data. Journal of Monetary Economics 34(2): 143–173. Berg A, Papageorgiou C, Pattillo C, Spatafora N. 2010. The End of an Era? The Medium- and Longterm Effects of the Global Crisis on Growth in Low-income Countries. International Monetary Fund (IMF): Washington, D.C. Cerra V, Saxena SC. 2008. Growth dynamics: the myth of economic recovery. American Economic Review 98(1): 439–457. See: Krugman, Paul. “The Path Not Taken.” The New York Times 21 October 2011. Available at http://www. nytimes.com/2011/10/28/opinion/krugman-the-path-not-taken.html

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Deb S. 2005. Trade first and trade fast: a duration analysis of recovery from currency crisis. Department of Economics, Rutgers University. Mimeo. Available at: ftp://snde.rutgers.edu/Rutgers/wp/ 2006-07.pdf Eichengreen B, Rose AK, Wyplosz C. 1995. Exchange market mayhem: the antecedents and aftermath of speculative attacks. Economic Policy 10(2): 251–312. Frankel JA, Rose AK. 1996. Currency crashes in emerging markets: an empirical treatment. Journal of International Economics 41(3–4): 351–366. Green D, King R, Miller-Dawkins M. 2010. The global economic crisis and developing countries. Oxfam International Research Report. Oxford: Oxfam. IMF. 1998. World Economic Outlook. International Monetary Fund (IMF): Washington, D.C. IMF. 2009. World Economic Outlook: Crisis and Recovery. International Monetary Fund (IMF): Washington, D.C. IMF. 2010. Preserving Debt Sustainability in Low-income Countries in the Wake of the Global Crisis. International Monetary Fund (IMF): Washington, D.C. Available at: http://www.imf. org/external/np/pp/eng/2010/040110.pdf ITC. 2010. ITC Trademap Factsheet: LDC Terms of Trade during Crisis and Recovery. Geneva: International Trade Centre (ITC). Karshenas M. 2009. The impact of the global financial and economic crisis on LDC economies. Report prepared for the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developed Countries and Small Island Developing States (UN-HORLLS). Available at: http://www.unescap.org/LDCCU/Meetings/BPOA-Jan2010/OHRLLS-Impact%20of% 20financial%20crisis.pdf Krueger AB, Lindahl M. 2001. Education for growth: why and for whom? Journal of Economic Literature 39(4): 1101–1136. ODI. 2010. The global financial crisis and developing countries: phase 2 synthesis. ODI Working Paper 316. UK: Overseas Development Institute (ODI). Park YC, Lee J. 2001. Recovery and sustainability in East Asia. NBER Working Paper No. 8373. Cambridge, MA: National Bureau of Economic Research (NBER). Reddy SG, Minoiu C .2009. Real income stagnation of countries 1960–2001. Journal of Development Studies 45(1): 1–23. Sims CA. 1980. Macroeconomics and reality. Econometrica 48(1): 1–48. UNCTAD. 2010. The Least Developed Countries Report 2010. United Nations: New York and Geneva. UNCTAD. 2011a. UNCTAD statistical database. http://unctadstat.unctad.org/ Retrieved on 17 September 2011. UNCTAD. 2011b. World Investment Report 2011. New York and Geneva: United Nations. World Bank. 2011. World development indicators. Available at: http://databank.worldbank.org/ddp/ home.do?Step=2&id=4&hActiveDimensionId=WDI_Series World Trade Organization. The impact of the financial crisis on least-developed countries. 2 December 2009. November 2011 http://www.wto.org/english/thewto_e/minist_e/min09_e/impact_fin_crisis_e. pdf. World Trade Organization. World Trade Report 2010. Geneva: World Trade Organization, 2010.


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TECHNICAL APPENDIX

% Deviation

Figure I. Impulse Response Function of loss in GDP to external demand shock

Years

% Deviation

Figure II. Impulse Response Function of loss in export growth to external demand shock

Years

The panels present impulse responses of output loss in LDCs, measured as the percentage change from a linear growth trend. The solid line is the mean of output loss, and the dashed line reflects one standard deviation from the mean.


J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid

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% Deviation

Figure III. Impulse Response Function of loss in GDP to terms of trade shock

Years

Figure IV. Impulse Response Function of pre-crisis output

1

0

Graphs by irfname, impulse variable, and response variable

Years



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% Deviation

Figure V. Impulse Response Function of loss in export growth to External Demand Shock

Years


Dependent variable: GDP/capita growth Lagged growth Growth in terms of trade Growth in external demand Lagged change in (FDI/GDP) Observations

Number of countries

0.117*** 0.042 0.085* 0.031 0.607* 0.355 0.104 0.112 166

31

Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.


J. Int. Dev. 24, 673–685 (2012) DOI: 10.1002/jid