Emerging Lessons from the Crisis

While the US and other advanced countries are still reeling from the effects of the sub-prime mortgage mess, emerging market economies seem to have dodged this bullet, at least until now. But many of them have drawn precisely the wrong lesson, and are halting – or even reversing – the liberalizing reforms needed to sustain rapid growth and macroeconomic stability.

ITHACA, NY – The US financial system is careening on the edge of a meltdown. All that has kept the much-vaunted font of global capitalism from sliding into cataclysm is the US government, which has effectively become the guarantor and lender of last resort.

How could things have come to such a pass in a financial system once touted as being the deepest and most sophisticated in the world? Where will it end? What effects will this have on the world financial system? It is difficult to answer these questions with much conviction while we are still in the midst of the crisis. Indeed, every passing day now seems to bring worse news—even weekends no longer provide respite from the steady stream of gloom!

Whatever the final outcome, one thing is certain– the rest of the world will no longer be enthusiastic about adopting the free-market principles that guided US financial development. While desperate times may call for desperate measures, massive US government intervention will also make it difficult in the future to make the case that the state should stay out of the workings of the financial system.

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