Impact of the global financial crisis on economic growth: implications for South Africa and other developing economies

Abstract

This paper examines the impact of the recent global financial crisis on economic growth in developing economies and South Africa in particular. It explores whether the events experienced by developing countries conform to what would be anticipated from economic theory. This is done by firstly comparing country growth forecasts for 2012 captured in 2008 at the beginning of the crisis to actual 2012 GDP growth data. Secondly, panel data analysis is used to investigate three important transmission channels, namely those of Trade, Capital Flows and Exchange Rates for 25 developing economies. The results suggest that economic forecasters in 2008 on average overestimated GDP growth for 2012 by -21.6 percent (excluding Venezuela). The only important transmission channel identified using Trend analysis to explain this negative impact on growth was capital flows. However when using Panel regression analysis all three channels were found to explain the economic impact of the crisis on GDP growth for developing countries, conforming to economic theory. It was discovered that, contrary to what was initially expected, portfolio inflows actually increased for most developing countries during the crisis. This possibly can be explained by the impact of quantitative easing in the USA. South Africa was found to have been negatively impacted by the global financial crisis, but to a lesser extent when compared to most other developing countries. The findings are important for global investors looking for new investment opportunities. The extent to which individual economies are "decoupled" from developed economies' performance provides possible opportunities for diversifying risk through a geographic spread of investor portfolios.