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University of Iowa News Release

 

Jan. 8, 2010

UI development expert: economic meltdown might be good for developing world

While the recession is wrecking economies around the globe, University of Iowa law professor Enrique Carrasco thinks the crisis might have a silver lining for the world's developing economies.

Carrasco's optimism stems from a decision last spring to include all members of the so-called G-20 nations in a new global finance regulatory organization, the Financial Stability Board (FSB). Since the G-20 includes countries with poorer, developing economies, the decision means they will for the first time have a voice in global financial policy.

"The global financial crisis has demonstrated not only the continued dependence of emerging and developing economies on the developed countries, but also the critical importance of emerging economies to global economic growth and future prosperity," said Carrasco, director of the University of Iowa Center for International Finance and Development in the UI College of Law.

Carrasco said that in the past, most global financial regulatory policy was set by organizations dominated by large countries with developed economies. Membership in groups like the G-7, World Bank and International Monetary Fund was made up mostly of the United States, Canada, Japan, Western European countries and, later, Russia. Smaller, poorer countries with less advanced economies had no say in those groups' decisions, he said.

The current global crisis, however, has shown developing economies are not only suffering from the global financial collapse, but the globe's interconnected economy means their damage might hinder recovery. Carrasco said there was hope at the beginning of the downturn that developing economies could continue the double-digit growth they'd seen since the 1990s and keep the global economic damage to a minimum.

But that growth stopped because such economies depend on foreign capital and investment that's all but dried up, and investors have pulled their foreign capital reserves from those countries for safer harbors. As a result, developing economies are suffering with the rest of the world.

"The crisis has shown that emerging economies are still highly susceptible to financial contagion, even when their fundamentals appear sound," Carrasco said.

There have been attempts in the past to include developing countries in global economic decisions, but Carrasco described their work in general as "underwhelming" and "toothless." He has hopes for the FSB because economists now more fully understand the importance of developing economies in a strong global economy, so richer countries seem more willing to listen to poorer countries.

The FSB has been assigned such tasks as monitoring and advising on market developments and their implications for regulatory policy, reviewing policy development work, developing proposed frameworks for corporate governance and compensation practices, advising and monitoring best practices in meeting regulatory standards.

He said the most important task is conducting early warning exercises with the IMF to prevent the kind of meltdown that shocked the financial system in 2007 and 2008.

"The current crisis cannot be overcome on a sustainable basis without taking into account the welfare and interests of developing economies," Carrasco said. "Ultimately, the FSB's fate will depend on the viability of the G-20 and the commitment of emerging economies to become partners with developed economies in a multi-polar global financial system."

Carrasco contributed a chapter about the topic, "Crisis and Opportunity: How the Global Financial Crisis May Give Emerging Economies Greater Voice in International Finance," for the book, "International Law, Economic Globalization and Developing Countries."

STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Iowa City, Iowa 52242-2500.

MEDIA CONTACTS: Enrique Carrasco, UI Center for International Finance and Development, 319-335-9059, enrique-carrasco@uiowa.edu; Tom Snee, University News Services, 319-384-0010 (office), 319-541-8434 (cell), tom-snee@uiowa.edu