EMDEs, including China; China’s shift toward a more balanced growth model; a sharp decline in commodity prices in 2012; bouts of financial stress in major EMDEs; and episodes of policy uncertainty that dampened confidence and weighed on investment.

Fourth, although growth is expected to stabilize somewhat, it will likely remain subdued in the near future—and subject to downside risks—and slow further over the longer term (World Bank 2019b). Population dynamics in EMDEs reached a turning point in 2010 when the share of the working-age population stabilized after several decades of rapid increases. Productivity growth is expected to remain lackluster as diminishing growth prospects weigh on investment. This will contribute to a potential growth slowdown of about 1.6 percentage points from pre-crisis rates, to an annual average of 4.3 percent in 2019-27 (World Bank 2018b).

Fifth, ample policy room, sound institutions, and international policy coordination helped mitigate the adverse effects of the 2009 global recession. The window of opportunity for rebuilding resilience before the next downturn materializes may be narrowing. This in turn highlights the urgent need to rebuild policy space to enhance the resilience of those EMDEs with eroded policy room.

Koh and Yu (2019a) make several contributions to a growing literature, drawing lessons from the global financial crisis and the 2009 global recession. First, Koh and Yu (2019a expand on earlier studies of the global recession by introducing an EMDE focus and extending the horizon of the discussion. Previous studies examined the initial impact of the global financial crisis on EMDEs, but did not reach far into the post-crisis period (Blanchard, Faruqee, and Das 2010; Berkmen et al. 2012; World Bank 2009). Other studies focused on the cross-border transmission of the crisis among advanced economies (Arestis and Karakitsos 2013; Blinder 2013; Imbs 2010; Mishkin 2011). A third set of studies examined the impact of the financial crisis on the real economy in advanced economies (Ball 2014; Bernanke 2018; Gertler and Gilchrist 2018; Perri and Quadrini 2018) or the lasting nature of the macroeconomic effects of the financial crisis (Chen, Mrkaic, and Nabar 2019; IMF 2018a). Second, Koh and Yu (2019a delve deeper into developments in specific EMDE regions and the largest emerging markets. Third, it draws lessons from the global recession that are relevant for today’s policy challenges.

# Chapter 4. Financial market developments

Across EMDEs, robust economic growth prior to the 2009 global recession was accompanied by rapid financial deepening, as documented by Arteta and Kasyanenko (2019). In the runup to the global recession, EMDE banks were the main source of domestic private sector credit and were mostly funded by local deposits. This softened the impact of the global liquidity tightening in 2008-09. After the global recession, however, several EMDEs went through credit booms fueled by supportive macroeconomic policies, large capital inflows and accommodative global financial conditions. These booms have left a legacy of elevated private debt. EMDE financial markets became more interconnected as capital flows increased and cross-border lending between EMDEs