common approach of encouraging a mildly undervalued currency will no longer be tenable, because of the need to redress global macro imbalances. He argues that instead, it may possible to achieve similar boost to the profitability of tradeables through explicit industrial policy, in order to promote manufactures and other non-traditional industries.

The long-term effect of the crisis on development thinking about globalization, then, is likely to be two-fold. First, there will be greater awareness among policymakers and researchers of the risks that come with integration, which offset better-known risk-dampening effects of integration. Policies toward trade, finance, and social protection will likely change as a result. Second, changes in the global development context as a result of rebalancing could reduce the attractiveness of exportled growth or, at a minimum, require new approaches and instruments to achieve it.

# **On financing development:  Reinforcing the dangers of relying on debt**

The newly rediscovered macroeconomic volatility has underlined the dangers posed by excessive reliance on others to finance development. The risks are clear at the country level, where this crisis has once again provided evidence that external debt and portfolio investment are not stable and reliable sources of financing. The dangers of excessive reliance on external debt have been shown in previous crises – the East Asian financial crisis, and before that the Tequila Crisis, and before that the debt crisis of the 1980s. Before, borrowing countries could perhaps reassure themselves that if they managed their own economies and finances well, then they had little to fear from debt financing. Korea, for example, financed the early stages of its rapid development with large external borrowing, at the cost of only one brief but sharp downturn in 1980. But recent crises have emphasized that interest spreads can rise and credit availability can dry up for reasons that are completely exogenous to the borrower, such as bad economic news afflicting other borrowers, or more recently financial troubles afflicting foreign banks in their home countries.

What is the alternative? We have also seen again in this crisis that reliance on external equity financing in the form of foreign direct investment carries considerably less risk. FDI has dropped off by much less than other sources of external financing, as noted earlier. But more importantly, high levels of domestic savings appear to shield countries from these exogenous crises. Most notable is the case of China, which entered this crisis with a very high national saving rate and therefore had none of the vulnerabilities posed by being a large net borrower. By contrast, the developing countries as a whole saw their reliance on external financing rise over the past two years, from 6.2 percent of GDP in 2006 to an estimated 7.8 percent of GDP this year, according to the _Global Development Finance 2009_ (World Bank 2009). In 25 of 98 countries, the ratio exceeded 20 percent of GDP.

What is true of countries is also true of governments. The fiscal effects of the crisis underline the risks to developing countries of running large fiscal deficits during periods of growth, such as the past five or six years. Governments need to “keep their powder dry” in good times, so that they can afford to adopt countercyclical fiscal policy during the crises that will inevitably come.

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