First, fiscal space had improved in many countries before the global financial crisis. In advanced economies, following severe deteriorations during the crisis, many indicators of fiscal space have virtually returned to levels in the mids.
In contrast, fiscal space has shrunk in many emerging market and developing economies since the crisis. Second, financial crises tend to coincide with deterioration in multiple indicators of fiscal space, but they are often followed by reduced reliance on short-term borrowing. Finally, fiscal space narrows in energy-exporting emerging market and developing economies during oil price plunges but later expands, often because of procyclical fiscal tightening and, in some episodes, a recovery in oil prices.
This is partly because arm's-length trade depends more heavily than intra-firm trade on emerging market and developing economies EMDEs , where output growth has slowed sharply from elevated pre-crisis rates, and on sectors with rapid pre-crisis growth that boosted arm's-length trade pre-crisis but that have languished post-crisis.
Compounding such compositional effects, arm's-length trade is also more sensitive to changes in demand and real exchange rates. For example, the income elasticity of arm's-length exports is about one-fifth higher than that of intra-firm exports. Hence, post-crisis global growth weakness has weighed more on arm's-length trade than on intra-firm trade. Unaffiliated firms may also have been hindered more than multinational firms by constrained access to finance during the crisis, heightened policy uncertainty, and their typical firm-level characteristics.
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