Good Crises? Implications for Developing Countries

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Abstract:

In this paper I argue that the most important consequences of the current economic crisis for developing countries will not be the direct negative economic effects, which have received the most attention. More important are the induced effects on politics, policy and institutions. In this context I ask: can the crisis provide opportune circumstances for developing countries to reform their institutions? Such a claim is implicit in the discussion by the Obama administration of not wanting to "waste a good crisis" and it is supported by a large social science literature on the implications of crisis for policy reform. I argue, however, that while there exists an optimistic scenario, there is also a pessimistic scenario. I illustrate both scenarios by examining the history of policy and institutional reform in the great depression of the 1930s and show that the consequences of this crisis for policy were very different in independent developing countries than they were in developed countries. I also argue that the recent experience of policy reform since the 1980s in fact provides less support for the "good crises" hypotheses than is commonly believed. Crises may be good or bad, depending on the nature of the political equilibrium in the societies they hit. I conclude with some speculation about Sub-Saharan Africa: though the most likely scenario is that the current shock is not large enough to change the institutional equilibrium in developing countries, if it were, there are circumstances which are consistent with the optimistic scenario.
See also: World Bank
Last updated on 12/04/2012