As the economic crisis of the late 200os unfolds, the need for global political, regulatory and supervisory changes becomes apparent. This paper is intended to clarify the role that least developed countries play in this process. Different channels of vulnerability are identified and examined both in a dynamic and static framework, thereby contributing to an understanding of how and to which degree the world's poorest countries will be affected by the current global economic turmoil. It arrives at the conclusion that LDCs are likely to be negatively affected by numerous structural factors and identifies low and high vulnerability states by constructing a composite Economic Vulnerability Index.
Table of Contents
1. Introduction
2. Least Developed Countries
2.1. Definition
2.2. Structural Features
3. The Economic Development from 2000 to 2007
3.1. Decoupling or Convergence?
4. The Economic Crisis of 2008
4.1. Anatomy of the Subprime Mortgage Crisis
4.2. Valuation Aspects and Asymmetric Information
4.2.1. Adverse Selection between Individual Actors
4.2.2. Moral Hazard between Individual Actors
4.2.3. The Role of Banks
4.3. Impact and Effects on the World Economy
4.4. Impact on Developing Countries
4.4.1. Direct Financial Channels
4.4.1.1. Financial Openness
4.4.1.2. Financial Institutions and the Real Economy
4.4.2. Spillovers from the Global Recession
4.4.2.1. Foreign Direct Investment
4.4.2.2. Aid Flow Volatility
4.4.2.3. Commodity Trading and Commodity Price Volatility
4.4.3. Preliminary Conclusions
5. Economic Vulnerability
5.1. Definition and Use
5.1.1. Economic Approach
5.1.2. Vulnerability in the Context of Political Science
5.2. Review of Existing Indices
5.2.1. Economic Characteristics of Small Size
5.2.2. Discussion
5.3. Construction of an Economic Vulnerability Index
5.3.1. Cautionary Notice
5.3.2. Methodology
5.3.3. Indicators of Structural Vulnerability
5.3.4. Exposure
5.3.4.1. Population Size
5.3.4.2. Location Index
5.3.5. Shock Index
5.3.5.1. Trade Shock Index
5.3.5.2. Financial Shock Index
5.3.6. Substitutability Index
5.3.6.1. Merchandise Export Concentration
5.3.6.2. Dependence on Strategic Imports
5.4. Dynamic Examination of Vulnerability Indicators
5.4.1. Financial Openness Index
5.4.2. Terms of Trade
5.4.3. Dependence on Strategic Imports Index
5.4.4. Export Concentration Index
5.4.5. Preliminary Conclusions
5.5. Economic Vulnerability Index 2006
5.5.1. Limitations of Indices
6. Conclusion
Research Objectives and Topics
This thesis examines the economic vulnerability of Least Developed Countries (LDCs) within the context of the 2008 global economic crisis. The research aims to clarify how these nations are affected by global economic turmoil through various channels, ultimately constructing a composite Economic Vulnerability Index to categorize countries by their vulnerability levels.
- Analysis of the structural features and economic characteristics of LDCs.
- Examination of the global financial crisis and its transmission mechanisms to developing economies.
- Evaluation of vulnerability frameworks from both economic and political science perspectives.
- Development of a composite index to quantify structural vulnerability.
- Assessment of dynamic changes in vulnerability indicators from 2000 to 2007.
Excerpt from the Book
4.1. Anatomy of the Subprime Mortgage Crisis
By now, the consensus has been established that the subprime crisis originated in the US housing market, spreading through a chain of securitizations on ever more complex layers to banks' balance sheets and finally to the real economy. As one example, Reinhart and Rogoff (2008) express this view by stating that “the United States sub-prime crisis, of course, has its roots in falling U.S. housing prices, which have in turn led to higher default levels particularly among less credit-worthy borrowers. The impact of these defaults has been greatly magnified due to the complex bundling of obligations that was thought to spread risk efficiently. Unfortunately, that innovation also made the resulting instruments extremely nontransparent and illiquid in the face of falling house prices” (p. 3). However, this consensus refers to where the build-up of the financial crash started and how the crisis unfolded rather than being concise about the why. Indeed, there is much less agreement on the possible causes than there is on the involved markets and institutions both in the academic community and in the political sphere. The following section will present approaches that differ in their emphasis on specific aspects of the crisis while reaching similar conclusions.
According to Clerc (2008), the subprime crisis has its roots in “the combination of historically low interest rates, credit and monetary expansion and booming asset prices” (p. 25). Low interest rates in combination with monetary expansion lead to an expansion in the volume of issued credit, thereby decreasing the incentives for lenders to correctly assess the borrowers' risk. In other words, when more money can be borrowed at cheaper rates, the likelihood of risky investments increases. Liebowitz (2008) expands on this view in emphasizing the role political institutions have played in the process. He argues that subprime mortgages are ultimately a politically intended instrument to provide for high home ownership rates (especially among ethnic minorities, as will be pointed out later).
Summary of Chapters
1. Introduction: This chapter sets the stage by comparing the current economic crisis to the Great Depression and establishes the paper's focus on the economic vulnerability of the world's poorest countries.
2. Least Developed Countries: This section defines LDCs and explores their core structural characteristics, such as high dependence on agriculture and primary commodity exports.
3. The Economic Development from 2000 to 2007: This chapter provides an overview of the global economic boom preceding the crisis and discusses the scientific debate regarding economic decoupling versus convergence.
4. The Economic Crisis of 2008: This chapter analyzes the anatomy of the subprime mortgage crisis, the role of asymmetric information, and the various transmission channels through which the recession impacts developing nations.
5. Economic Vulnerability: This chapter develops a theoretical framework for vulnerability, reviews existing indices, and constructs a new composite Economic Vulnerability Index to rank LDCs.
6. Conclusion: This final chapter synthesizes the research findings, reflecting on the impact of the crisis on LDCs and the limitations of the constructed indices.
Keywords
Economic Vulnerability, Least Developed Countries, LDC, Subprime Mortgage Crisis, Global Recession, Financial Openness, Economic Development, Commodity Prices, Structural Vulnerability, Economic Index, Foreign Direct Investment, Aid Flow Volatility, Financial Institutions, Market Failure, Asymmetric Information.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis focuses on the economic vulnerability of Least Developed Countries (LDCs) and how they are affected by the global economic turmoil resulting from the 2008 subprime mortgage crisis.
What are the central thematic fields addressed?
The study covers international macroeconomics, the structure of financial markets, economic development indicators, and the construction of composite indices for vulnerability assessment.
What is the primary research goal?
The primary goal is to examine how different channels of vulnerability transmit the global economic crisis to the poorest countries and to develop a composite index to measure their structural vulnerability.
Which scientific methods are applied?
The research employs a mix of descriptive analysis of economic trends, literature review of existing vulnerability indices, and quantitative construction of a new composite Economic Vulnerability Index using standardized indicators.
What topics are discussed in the main part?
The main part covers the anatomy of the 2008 crisis, the theoretical concepts of economic and political vulnerability, and a detailed methodology for constructing an index that incorporates population size, location, and trade shocks.
Which keywords characterize this work?
Key terms include Economic Vulnerability, LDC, Global Recession, Financial Openness, and Structural Vulnerability.
How does the author define "vulnerability" in this context?
The author references Guillaumont's definition of vulnerability as the risk of being harmed by unforeseen exogenous events, distinguishing between structural vulnerability and policy-induced vulnerability.
Why is the "substitutability index" significant for LDCs?
It is introduced to measure the extent of a country's specialization; countries that rely heavily on single-commodity exports are identified as being more exposed and vulnerable to sudden price drops or supply shocks.
What is the main finding regarding financial openness?
The findings suggest that when financial openness is given a higher weight in the composite index, the vulnerability scores for many LDCs actually show variations, highlighting that different dimensions of exposure interact in complex ways.
- Quote paper
- Florentin Krämer (Author), 2009, Economic Vulnerability of Least Developed Countries in Light of the Current Economic Crisis, Munich, GRIN Verlag, https://www.grin.com/document/147251
