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Evolving policy challenges for developing countries

For most developing economies the crisis-management challenges of the great recession have passed and output gaps have been closed. In part, because the international environment remains volatile and high-income countries are still struggling with the aftermath of the crisis, policy in many developing countries remains focused on crisis-fighting.  Given the sharp shifts in market sentiment that have been observed and developing country vulnerabilities, such a focus is understandable, but focus needs to shift toward the longer-term and policy needs to guard against maintaining a loose stance too long.

This is particularly the case for the many developing countries already operating at or above capacity. In these countries, policy should work to strengthen prudential frameworks, and avoid further stimulus. Instead the authorities should rebuild fiscal and monetary-policy space so that they can respond forcefully should a second global (or forceful domestic) crisis emerge (see earlier discussion).

Moreover, policy needs to start re-investing in human and physical capital to ensure rapid and sustainable growth in a post-crisis world where high-income fiscal and monetary policy have returned to a more sustainable stance and some of the conditions (such as inexpensive and abundant capital) that have driven the very high growth rates of the past decade may no longer hold.

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