terms in at least one year during 2002-07.<sup>7</sup> EMDE equity market valuations, as reflected by the MSCI index, more than quadrupled during 2002-07; EMDE bond spreads, as captured by the EMBI, and sovereign CDS spreads in major EMDEs more than halved between January 2005 and June 2007. Benign financing conditions encouraged strong investment growth (12 percent a year, on average, during 2002-07) in EMDEs. More than one-quarter of EMDEs witnessed an investment surge in at least one year during 2002-07.<sup>8</sup> Most of these investment surges were fueled by credit booms (Ohnsorge and Yu 2016). Meanwhile, private consumption growth remained robust (6.3 percent a year, on average, during 2002-07) as household incomes grew and employment opportunities expanded.

The decline in global poverty was faster than expected prior to the 2009 global recession. In September 2000, the international community adopted the Millennium Development Goals. Among them was the goal to halve the share of the global population living on less than $1.25 a day between 1990 and 2015. As a result of rapid EMDE growth, the goal was achieved five years earlier than targeted, in 2010. China’s rapid expansion accounted for about three-fifths of this decline in global poverty while the remainder mostly reflected progress in Brazil, India, Indonesia, and Pakistan (World Bank 2016b). The number of low-income countries (LICs) declined to 49 in 2007 from 64 in 2001. Rapid LIC growth (4.6 percent a year, on average, during 2001-07), supported by several factors—such as the commodity price boom, debt relief, receding armed conflicts, and trade integration—facilitated their transition to middle-income status (World Bank 2019).

# **3. During the 2009 global recession: Resilience**

The 2009 global recession affected EMDEs through trade and financial channels. In many EMDEs, trade collapsed. The plunge in commodity prices weighed on growth in commodityexporting countries, while reversals of financial flows, especially portfolio investment and cross-border bank lending, led to severe credit crunches. That said, EMDEs weathered the recession better than advanced economies. First, their links with the financial institutions and markets at the center of the crisis in advanced economies was limited. Second, services trade and flows of FDI, remittances, and foreign aid was resilient. Third, swift policy actions were taken to stabilize financial systems and stimulate aggregate demand.

The global financial crisis in 2008 led the global recession in 2009. Triggered by defaults in the U.S. sub-prime mortgage market, the U.S. financial system came under increasingly severe stress in the second half of 2007 and early 2008, culminating in a collapse in housing prices in late 2008 (Figure 2). The bankruptcy of Lehman Brothers in September 2008 triggered a run on key funding markets. This exposed the fragility of banks that were dependent on short-term wholesale funding, which had been essential to the rapid growth of securitization, and also reflected inadequate regulatory oversight (Duffie 2019).

> 7 Based on 135 EMDEs with available data.

> 8Based on 132 EMDEs with available data. An investment surge is defined as an episode during which the real gross fixed investment-to-GDP ratio is at least one standard deviation above the Hodrick-Prescott-filtered trend (Ohnsorge and Yu 2017; World Bank 2016a).

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