Macroeconomic policy, stimuli, aid and budgeting: what options?

Developing countries are being severely hit by the global crisis. However, the ability of different countries to respond varies considerably. A number of middle-income countries have foreign reserves and fiscal space to mitigate the effects of the crisis, but low-income countries (LICs) do not have the resources to cushion the macroeconomic shock. This article finds that, among LICs, sub-Saharan African aid-dependent countries are particularly vulnerable. It recommends that developing country governments should use a range of economic and financial policy instruments to combat the downturn, and highlights what in previous crises has worked well, e.g. counter-cyclical mechanisms, which helped protect the most vulnerable, and large-scale external financing packages, critical in helping countries recover fast. Given the nature of the current crisis, and the fact that different shocks tend to overlap, the article argues that the international community should seek to develop a more integrated approach to dealing with shocks.