Why depressions in developing countries are so extreme

depression in developing country
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Depressions are rough for any country. But when developing countries deal with them, they can get extreme. When Zimbabwe went through a financial crisis a few years ago, people literally had to carry backpacks of money to buy bread.

A recent Planet Money episode explored why developing countries go through sudden, deep recessions. This did not initially make much sense to me; recessions don't seem like a "developing country" thing, they seem like an everybody thing. But as it turns out, developing countries have to deal with an additional obstacle: us.

At first, the podcast's description of all these developing country depressions pretty much sounded like the U.S. economy, which has been cycling through booms and busts since the beginning. During booms, work is plentiful and there's money in the air, literally — everyone's spending money that doesn't exist. Eventually, somebody notices that money isn't real, particularly all this nonexistent money that people are spending. Once enough people pull on that block, the whole economy goes down like Jenga.

"The bust is when people begin to realize that the game is up," said George Magnus, an economist at Oxford University.

If this happens in a developing country, there's another layer. Developing countries are developing largely because they're borrowing so much money from wealthy countries. Investors start to worry that they and other investors have been lending too much, and the economy may be about to take a turn.

"Foreign investors in particular start pulling their money out of the country," said Cardiff Garcia, a host on Planet Money.

Sometimes, it seems like wealthy countries even seem to know they're planting the seeds of a future bust from the beginning. Look at what happened right before Turkey's recent bust:

"The banks that were lending to these Turkish companies wanted to be paid back in dollars because they didn't trust the Turkish lira to hold its value," explained Stacey Vanek Smith, the other Planet Money host. "So the banks agreed to lend the money only in dollars instead. That way, if the Turkish lira fell, the banks wouldn't get paid back in a worthless currency."

Once the bust starts, those rich countries pull out of their investments, yanking even more money out of the country and making the depression so much worse.

"When a crisis hits an emerging market country, it's always a deep disappointment, not just for the obvious reason that a crisis is always bad but also because a crisis stops an emerging market country's progress in catching up to the living standards of richer countries," said Garcia. "So there is an important human element here."

Boom and bust cycles may just come with Capitalism, but wealthy countries are the ones kicking developing countries when they're down.

Why depressions in developing countries are so extreme
Boom-and-bust cycles are no coincidence.

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