This paper investigates the medium- and long-term growth effects of the global financial crises on Low-Income Countries (LICs). Using several methodological approaches, including impulse response function analysis, growth spells techniques and panel regressions, we show that external demand (ED) shocks are not historically associated with sharp declines in output growth. Given existing evidence that LICs were primarily impacted by such a shock in the global financial crisis, our analysis provides some optimism on the chances that LICs will avoid a protracted period of slow growth. However, we also show that there seem to be persistent output losses associated with ED shocks in the medium run. In terms of policy implications, our analysis provides evidence that countries with lower deficits, lower debt, more flexible exchange rate regimes, and a higher stock of international reserves are more likely to dampen the effects of an ED shock on growth. Low-income countries (LICs) as a group have enjoyed relatively rapid growth in recent years. Since 1995, for example, sub-Saharan Africa has grown faster than developed countries, after many years of poor average performance (IMF, 2008 and Collier et al, 2008). This growth has not been sufficient to put LICs on the path to meeting most of the Millennium Development Goals (MDGs), but it has reduced poverty and supported better health and education outcomes in many countries (IMF-World Bank, 2010).

Estimates for 2009 suggest that the global financial crisis had already substantially slowed growth in most developing countries, thrusting millions back into poverty and setting back efforts to achieve the MDGs. If, in addition, the crisis has longer-run implications, that is, if it knocks countries off their track of solid medium-long-term growth, it will be a much greater disaster. The question is especially pressing insofar as the growth resurgence since the mid-1990s has been associated with generally supportive external conditions: strong global growth, stable or rising commodity prices, and increasing inflows of external capital. Thus, in considering the implications and policy response to the current crisis, it is important to consider the risks to sustaining medium-term growth.