The financial crisis, which originated in the developed countries starting with the United States, has by now fully engulfed both emerging economies such as China as well as LDCs such as Zambia. This despite the fact that the majority of developing countries had in place what have been widely touted as ‘responsible’ fiscal and monetary policies.
The channel of transmission was not the decline of asset prices and losses in the financial sector as in the case of transmission to other developed countries. Instead, the crisis has been transmitted through the now familiar ‘sudden stop’ mechanism where capital inflows to the developing world dry up. The drying of trade credit and reduced demand for developing country exports has helped exacerbate the impact on developing countries.