Ask an Economist: Lessons from the Financial Crisis

Ilene Grabel

Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. A reader asked:

Q: What will be the impact of the economic crisis on the financial literacy of the Developing Countries?

Grabel: It may well be that financial literacy in developing countries improves as a consequence of the economic crisis. This may be due to the experiences of rich countries, where it turns out that levels of financial literacy were quite low.

Certainly there are many structural reasons why corporations, municipal governments, and households deployed exotic, opaque and highly risky financing strategies and instruments in the run up to the crisis. And we know that credit rating agencies understood the risks of these instruments and financing strategies to much less of an extent than we would have imagined prior to the crisis. Thus, we may see a reduction in the developing world of enthusiasm for replicating the financial models of the rich countries. This would be a kind of silver lining associated with the current crisis.

It might also be the case that there is more interest in increasing the availability of domestically generated sources of finance in the developing world (in contrast to the tendency to rely on external sources of finance, such as portfolio investment, foreign direct investment, foreign bank loans, remittances). This may be due to the fact that the risks of at least most of these sources of finance have been made plain by the crisis.

3 Responses to “Ask an Economist: Lessons from the Financial Crisis”

  1. lavkesh says:

    There is discussion about impact of economic crisis. what we learn these financial crisis. how can be overcome these crisis ?

  2. Ilene Grabel says:

    Good question–there are many things to be learned from the financial crisis, among them are the following–liberalize financial flows only slowly and cautiously; understand the significant risks of introducing complex, opaque financial instruments; understand the real limits of national, regional, and global financial architectures; the US financial system should not be a model for developing country financial reform projects (and the current form of the eurozone should not be either); and it is important to focus on domestically-generated sources of finance.

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