Crisis? What Crisis?

We went through a terrifying moment back in the fall of 2008. The financial system in the United States was imploding. It was impossible to predict how the effects would ripple through the rest of the world, but one outcome seemed inevitable: Developing economies were going to take a terrible hit. There was just no way they could escape the maelstrom without seeing millions of their citizens impoverished.

Many emerging-market countries did experience sharp drops in GDP. Their capital markets tanked. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), sounded downright apocalyptic: "All this will affect dramatically unemployment, and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war." The Economist recently noted, "The Institute of International Finance (IIF), a think-tank in Washington, DC, forecast that net private capital flows into poor countries in 2009 would be 72% lower than at their peak in 2007, an unprecedented shrinkage." Virtually everyone expected to see the countries that had benefited so dramatically from growth in the years leading up to the crisis to suffer disproportionately in its wake.

An entirely rational assumption — except it hasn’t turned out that way at all. To be sure, there were far too many poor people in the world before the crisis, and that still remains the case. Some 3 billion people still live on less than $2.50 a day. But the global economic crisis hasn’t added appreciably to their ranks.

Just take China, India, and Indonesia, Asia’s three biggest emerging markets. Although growth in all three slowed, it never went into reverse. China’s robust growth through the crisis has been much publicized — but Indonesia’s, much less conspicuously. Those countries, as well as Brazil and Russia, have rebounded dramatically. The Institute of International Finance — the same people who gave that dramatically skepticism-inducing estimate earlier — now says that net private capital flows to developing countries could reach $672 billion this year (double the 2009 amount). That’s less than the high point of 2007, to be sure. But it still seems remarkable in light of the dire predictions.

In short, the countries that have worked the hardest to join the global marketplace are showing remarkable resilience. It wasn’t always this way. Recall what happened back in 1997 and 1998, when the Thai government’s devaluation of its currency triggered the Asian financial crisis. Rioting across Indonesia brought down the Suharto government. The administration of Filipino President Joseph Estrada collapsed. The turbulence echoed throughout the region and into the wider world, culminating in the Russian government default and August 1998 ruble devaluation. Brazil and Argentina trembled. The IMF was everywhere, dispensing advice and dictating conditions. It was the emerging markets that bore the brunt of that crisis.

So what’s different this time around? The answers differ from place to place, but there are some common denominators. Many of the BRICs (Brazil, Russia, India, China) learned vital lessons from the trauma of the late 1990s, hence the IMF’s relatively low-key profile this time around. (The fund has been most active in Africa, where they still need the help — unless you count Greece, of course.)

Many emerging economies entered the 2008-2009 crisis with healthy balance sheets. In most cases governments reacted quickly and flexibly, rolling out stimulus programs or even expanding poverty-reduction programs. Increasingly, the same countries that have embraced globalization and markets are starting to build social safety nets. And there’s another factor: Trade is becoming more evenly distributed throughout the world. China is now a bigger market for Asian exporters than the United States. Some economists are talking about "emerging market decoupling." Jonathan Anderson, an emerging-markets economist at the Swiss bank UBS, showed in one recent report how car sales in emerging markets have actually been rising during this latest bout of turmoil — powerful evidence that emerging economies no longer have to sneeze when America catches a cold.

Aphitchaya Nguanbanchong, a consultant for the British-based aid organization Oxfam, has studied the crisis’s effects on Southeast Asian economies. "The research so far shows that the result of the crisis isn’t as bad as we were expecting," she says. Indonesia is a case in point: "People in this region and at the policy level learned a lot from the past crisis." Healthy domestic demand cushioned the shock when the crisis hit export-oriented industries; the government weighed in immediately with hefty stimulus measures. Nguanbanchong says that she has been surprised by the extent to which families throughout the region have kept spending money on education even as incomes have declined for some. And that, she says, reinforces a major lesson that emerging-market governments can take away from the crisis: "Governments should focus more on social policy, on health, education, and services. They shouldn’t be intervening so much directly in the economy itself."

This ought to be a big story. But you won’t have much luck finding it in the newspapers — perhaps because it runs so contrary to our habitual thinking about the world economy. The U.N. Development Programme and the Asian Development Bank recently published a report that attempts to assess what effect the crisis will have on the world’s progress toward the U.N. Millennium Development Goals, benchmarks that are supposed to be achieved by 2015. At first glance the report’s predictions are daunting: It states that 21 million people in the developing world are "at risk" of slipping into extreme poverty and warns that the goals are unlikely to be met. Many experts wonder, of course, whether the V-shaped crisis we’ve witnessed so far is going to turn into a W, with another sharp downturn still to come. Some argue that the Great Recession’s real damage has yet to be felt.

Yet the report also contains some interesting indications that this might not be the case. "The global economic crisis has been widely predicted to affect international migration and remittances adversely," it notes. "But as the crisis unfolds, it is becoming clear that the patterns of migration and remittances may be more complex than was previously imagined." In other words, these interconnections are proving to be much more resilient than anyone might have predicted earlier. As the report notes, receipts of remittances have so far actually increased in Bangladesh, India, Nepal, Pakistan, Philippines, and Sri Lanka. Perhaps migrant workers — those global experts in entrepreneurship and risk-taking — know something that a lot of the rest of us don’t.

So why should we care? Anirudh Krishna, a Duke University political scientist who studies poverty reduction, says that there’s a moral to the story: "Certainly cutting countries and people off from markets is no longer a sensible thing to do. Expanding those connections, bringing in a larger part of a talent pool into the high-growth sector — that is what would make most countries grow faster and more individuals climb out of poverty." Echoing Nguanbanchong, he argues that governments are well-advised to concentrate on providing their citizens with education and health care — the great enablers in the fight for social betterment. Microfinance and income subsidy programs can fill important gaps — as long as they aim to empower future entrepreneurs, not create cultures of entitlement.

This is not to say the outlook is bright on every front, of course. As the Economist noted, the number of people facing hunger recently topped 1 billion, the highest since 1970. The reason for that has more to do with the 2007-2008 spike in food prices than with the financial crisis. (Remember how the price of rice shot up?) We are still a long way from conquering poverty. There is still a huge — and in some cases growing — gap between the world’s rich and poor. Yet how remarkable it would be if we could one day look back on the 2008-2009 crisis as the beginning of a more equitable global economy.