# **1. Introduction**

The world economy is in the midst of the most severe recession of the post-World War II period (World Bank 2020). This recession dwarfs the previous recession a decade ago, in 2009, when global output contracted by 1.8 percent, global trade collapsed by 9.9 percent, and investment declined by 9.0 percent, after robust expansions in output, trade, and investment in 2007 (of 4.3 percent, 7.3 percent, and 5.0 percent, respectively). Then as now, the recession in advanced economies was particularly pronounced, with activity declining by 3.4 percent in 2009. Despite unprecedented stimulus, the post-crisis recovery in advanced economies was anemic.

Although the crisis originated in the United States, the subsequent collapse in global trade and capital flows affected emerging markets and developing economies (EMDEs) as well. That said, EMDEs on the whole managed the global recession relatively well, especially those that were less dependent on external trade and finance, and those with strong pre-crisis fundamentals. Overall, EMDE output grew at a lower rate (at 1.6 percent) in 2009 but did not contract. This resilience partly reflected pre-crisis policies that reduced the vulnerabilities of EMDEs to external shocks and allowed the use of countercyclical policy stimulus during the crisis. The post-crisis decade, however, was marked by slowing or weak EMDE growth amid a series of financial and commodity price shocks and weakening fundamental drivers of growth, resulting in limited policy space in 2020.

Since advanced economies were more adversely affected by the financial crisis, the role of emerging markets and developing economies increased in the global economy. By 2018, the share of EMDEs in the global economy had increased to 39 percent of global GDP (from 31 percent in 2007) at 2010 market exchange rates. EMDEs’ share of global trade also increased, to 36 percent during 2011-18 from 30 percent during 2002-07. In 2018, the seven largest emerging markets (EM7) alone accounted for 20 percent of global trade, compared to 15 percent in 2007.<sup>1</sup> EMDEs continued to be the largest source of commodity demand growth (Baffes et al.2018). During 2008-2016, the EM7 accounted for almost all of the increase in global consumption of metals and energy and a sizeable share of the increase in consumption of grains (corn, rice, and wheat; Baffes et al. 2018).

Given the growing role of EMDEs in the world economy, major economic disruptions are more likely to be felt by developing countries today than during the 2009 global recession. This risk coincides with a subdued outlook for EMDEs amid weak investment, rising debt and heightened policy uncertainty. A valuable lesson from the 2009 global recession is the importance of strong economic fundamentals, prudent financial systems, and sufficient policy room for governments and central banks to act when their economies are hit by shocks. However, when the 2020 global recession struck, many EMDEs had not yet rebuilt the policy buffers that were deployed successfully during the 2009 global recession. Like advanced economies, EMDEs engaged again—and appropriately—in swift and large-scale fiscal and monetary stimulus to dampen the economic damage of the COVID-19 pandemic in

> 1 EM7 are Brazil, China, India, Indonesia, Mexico, Russia, and Turkey.

2