From the note:
"Never let a crisis go to waste" is a call frequently voiced since the onset of the Financial Crisis in 2009. When a crisis strikes, it can open the door to opportunities for policy course correction that would not otherwise be available. Countries can capitalize on a crisis to “build back better,” another phrase that has gained considerable currency. But in many cases, countries are unable to take advantage of the latent opportunities, if any, and the moment passes.
Experience suggests that the potential inherent in crises has been oversold. Countries have experienced “good” crises, which unlocked policy actions. The positive outcomes that followed were the result of a congruence of enabling factors. In most instances, countries hit by a crisis are ill-prepared to define and implement a comprehensive plan. A program, which is hastily assembled to cope with the situation and obtain financing from donors, frequently does not lead to the required adjustments and can result in a cycle of crises that gradually erode a country’s economic potential. And there is a minority of cases in which the onset of a crisis results in a vicious spiral and economic collapse, especially when a country is rendered vulnerable by political dysfunction, state failure or a civil war.
Whether countries respond to a crisis with policies that attempt to comprehensively address macroeconomic and institutional problems, or with partial and temporizing fixes, or through inaction because the political will and/or the state capacity is lacking, depends more on country circumstances—economic, political, and institutional—and less on the intrinsic severity of the crisis itself. To illustrate these three scenarios, this note examines the onset of crises in seven countries, the adequacy of the response in five, and the toll crises have taken on the two that failed, for largely political reasons, to rebuild institutions and restore a degree of normality.
India in 1991, Korea in 1997-8, and Türkiye in 2001 took advantage of the opportunities presented by their crises to restore equilibrium and rekindle growth. Pakistan and Argentina have been plagued by a succession of crises stretching over several decades that governments did not adequately tackle each time they struck. The crises that beset Venezuela starting in 2012 and Lebanon commencing in 2019 led to economic and social implosions, a virtual breakdown of the economic system and a severe erosion of the state’s institutional scaffolding. In each of these cases, nothing was preordained. Countries that undertook effective economic reforms could easily have wasted the opportunity at hand. Countries that have endured a cycle of crises are victims of their own repeated inaction, political paralysis, and policy failures. The ones that slipped into an economic abyss could conceivably have dodged the bullet if politics had not gotten in the way.
Read the full note here.
