Dana Salman

The global financial crisis was integrated into the existing economic system. Triggered by banks offering subprime mortgages (high default risk) to households and turning them into very complex, cloudy derivatives, it led to the crash of banks, which did not have enough capital to withstand the shock. These factors lacked regulatory guidance, but nonetheless were endogenous to the system. The looming 2020 crisis is triggered by an external factor – COVID-19. In contrast to the global financial crisis, it was not the outcome of a hole in the system, even if it is revealing the holes in that system, shedding light on healthcare inequality and infrastructure and the importance of essential workers that are often underpaid and “invisible”. It’s an exogenous element that taps at almost all other endogenous ones. 

The 2008 crisis was mainly a negative demand shock while this one is definitely both a supply and demand shock. People are still consuming, but mainly the necessities and hence, this has an effect on so many industries that depend on consumer spending on non-essential goods and services, such as travel, tourism and apparel. The supply shock here is due to a halt in production and labour participation as an outcome of social distancing measures. Most economic analysis is based on demand shocks, as it is the most common type of shock and hence, with a major unprecedented supply shock along with the uncertainty and lack of control over the time frame of the shock, it is more difficult for analysts to fully understand the impact and suggest policies with full certainty to mitigate the effect. 

In relation to the illiquidity of our beloved US dollar, crashing asset prices, appreciation of the US dollar that leads to a contraction of dollar funding was seen in 2008 as well as now, yet the implications are completely different. Learning from the 2008 crisis, banks are much more equipped when it comes to short term liquidity, but the major issue with this crisis is that non-banks are just as much in need of the US dollar. Due to the disruption in global supply chains, non-financial corporations are in need to raise funds to pay their suppliers, offer credit lines for buyers or simply to keep their employees’ paychecks flowing. However, banks tend to de-risk and hence, cut dollar funding and the central banks cannot directly lend to non-banks. This will lead to innovation in policy making and financial instruments. 

Developing Economies

The financial crisis of 2008 started in developed countries, but there is no doubt that its ramifications were global, affecting the developing economies’ financial markets too. A paper published by the UNDP in 2009 titled ‘The Financial Crisis and its Impact on Developing Countries’ discussed the importance of co-operative policy decisions between both developing and developed economies. The role of emerging countries, especially those that are significant in size, appeared to be of great importance in placing corrective measures that helped both developed and developing markets recover. Shining light on the ironic exclusivity of globalization, developing countries were the last to be hit by the pandemic, mainly through tourists from developed countries, a delayed impact that is similar to the 2008 crisis, albeit very different in nature. 

The responses to the pandemic have differed significantly between developed and developing countries. Learning from tragic experience with other infectious diseases in the past, developing countries were swift in action and used cost-effective solutions with a national solidarity ethos in dealing with the pandemic. In Mauritius, airport screening and precautionary measures were put in place two months before any cases were detected. Vietnam, which has experience with the 2003 SARS outbreak, implemented quarantine procedures based on risk rather than symptoms to avoid a nation wide lockdown. In Latin America, Colombia was quick to launch an app that enabled citizens to be better informed on the spread of the virus in the country. To date, these measures have been relatively effective in controlling the spread of the virus and its impact on the economy. It is important to mention these successes of developing nations as they are yet another example of how important it is for developing and developed nations to assist one another through the transfer of knowledge and experience. 

While it is important to mention the previous examples, they are only a few of many developing countries and that should not take away from the importance of factors that might blur these success stories or the very significant long term impact on developing countries. Unlike the developed countries, access to testing kits is much more limited and hence, the number of cases or COVID-19 related deaths may be erroneously lower. The restricted access to resources stretches far beyond test kits in developing countries, to budgetary restrictions in implementing tax waivers or welfare programs. This places an even heavier burden on developing countries to repay debts, with more than 90 countries having already approached the IMF for emergency funds. Moreover, due to the differences in positioning of these countries on their growth trajectories, every country will be impacted by disruption in supply chains differently. For most developing countries, the 2008 crisis was a series of indirect effects of the direct exposure of risky financial instruments in large developed countries. With the global 2020 crisis, however, most developing countries face many direct effects of the pandemic as they mainly rely on the primary sector, requiring physical labour with production efficiency that is difficult to recreate with social distancing measures. Whereas for most developed nations that are much more diversified and where the tertiary sector dominates, the move of financial and business services to a ‘work-from-home’ scheme is much easier. This means that the impact of the disruption of supply chains in developing countries will have substantially large short-term impacts as well as detrimental long-term effects.

Whether the overall impact will be worse than that of the 2008 crisis or not is a question that even the experts are completely uncertain about because no one knows how long the pandemic is going to last. Some say it is way worse because there is no policy rule book for a large-scale REAL economy freeze while some say money not spent now will eventually be spent later and this is all very temporary.


Brien, P. (2020). Coronavirus in developing countries: Mapping national policy responses. [online] UK Parliament. Available at: https://commonslibrary.parliament.uk/coronavirus-in-developing-countries/

Brinca, P. et al. (2020). Is the COVID-19 Pandemic a Supply or a Demand Shock?. [online] Federal Reserve Bank of St. Louis. Available at: https://research.stlouisfed.org/publications/economic-synopses/2020/05/20/is-the-covid-19-pandemic-a-supply-or-a-demand-shock

Frum, D. (2020). The Coronavirus Is Demonstrating the Value of Globalization. [online] The Atlantic. Available at: https://www.theatlantic.com/ideas/archive/2020/03/dont-abandon-globalizationmake-it-better/608872/

Griffith-Jones, S and Ocampo, J.A. (2009). The Financial Crisis and its Impact on Developing Countries. UNDP. 

Hawker, E. (2020). COVID-19: The Impact On Developing Economies. [online] Business Because. Available at: https://www.businessbecause.com/news/insights/7052/covid-19-impact-on-developing-economies?page=2

Mormina, M and Nsofor, I.M. (2020). What developing countries can teach rich countries about how to respond to a pandemic. [online] The Conversation. Available at: https://theconversation.com/what-developing-countries-can-teach-rich-countries-about-how-to-respond-to-a-pandemic-146784

Slavitt, A. (2020). “Essential” Means Underpaid and Unprotected. [online] Medium Coronavirus Blog. Available at: https://coronavirus.medium.com/essential-means-underpaid-and-unprotected-703c8adcf2e1

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s