By M Ayhan Kose, Franziska Ohnsorge, Lei (Sandy) Ye
Emerging markets face their fifth consecutive year of slowing growth. This column examines the nature of the slowdown and appropriate policy responses. Repeated downgrades in long-term growth expectations suggest that the slowdown might not be simply a pause, but the beginning of an era of weak growth for emerging markets. The countries concerned urgently need to put in place policies to address their cyclical and structural challenges and promote growth.
Since 2010, growth has been slowing in emerging market economies. Emerging market growth has remained well below pre-Crisis (2003-08) rates and, by 2014, had fallen below its long-term (1990-2008) average (see Figure 1). The growth differential between emerging markets and advanced economies has also narrowed to its lowest level since the early 2000s. This follows half a decade during which emerging markets as a group achieved their highest growth since the 1980s and became the main engine of global activity.
Figure 1. Growth in emerging markets
Source: World Bank Global Economic Prospects and World Development Indicators, IMF World Economic Outlook.
Notes: A. Weighted average growth.
B. Difference between weighted average emerging market growth and weighted average advanced economy growth.
There has been intense debate about the nature of appropriate policy responses to the growth slowdown in emerging markets (e.g. Annunziata 2013, Munyo and Talvi 2013, Armstrong et al 2015). In a recent paper (Didier et al 2015), we analyse the slowdown in emerging markets in order to shed light on this debate, addressing the following questions:
- What are the main characteristics of the slowdown?
- What are the key drivers of the slowdown?
- Which policies are available to stimulate growth?
What Are the Main Characteristics of the Slowdown?
The slowdown has been unusually synchronous and protracted. It has affected a sizable number of emerging markets, especially large ones.
- Although the slowdown is taking place against a backdrop of a weak, but not stressed, external environment, its breadth is comparable to previous episodes of global turmoil. By 2014, the number of emerging markets slowing for three consecutive years reached the levels seen during the Global Crisis of 2008-09 (Figure 2).
- The deceleration in emerging market growth has been broad-based, with concurrent declines in growth in most components of demand. Growth rates of investment and exports suffered especially sharp cutbacks, falling to less than half of their 2003-08 average levels.
- The slowdown has been associated with repeated downward revisions in emerging market growth forecasts. Recent growth forecasts for 2015 are slightly below 4%, down from growth rates as high as 7.6% in 2010 (Figure 2).
Figure 2. Emerging market slowdown: Synchronous and disappointing
Source: World Bank Global Economic Prospects (GEP) and World Development Indicators, IMF World Economic Outlook (WEO), Consensus Forecasts (Consensus).
Notes: A. Number of emerging market countries in which growth slowed for three consecutive years by the year denoted. BRICS refers to Brazil, Russia, India, China, and South Africa.
What Are the Key Drivers of the Slowdown?
The emerging market growth slowdown was initially driven by external factors but domestic factors have increasingly weighed on growth since 2014. External factors holding back growth since 2011 include weak world trade, low commodity prices, and tightening financial conditions (Figure 3). Domestic factors include a steady slowdown in productivity growth, bouts of policy uncertainty, and an erosion of policy buffers that has made it difficult to support activity with fiscal and monetary stimulus.
Decelerating potential growth has, on average, accounted for one-third of the slowdown in EM growth since 2010. However, the degree to which structural factors contributed to the slowdown varies widely across countries. Much of the decline in potential growth resulted from a slowdown in productivity growth.
Figure 3. Drivers of the slowdown and evolution of potential growth
Source: World Bank estimates, Haver Analytics.
Notes: A. Based on a Bayesian vector autoregression estimation using data for 1998:1 to 2015:2 for 18 EM. Each bar shows the percentage point deviation of growth from the sample mean. See Didier et al (2015) for additional details.
B. Unweighted averages to reflect the full universe of emerging markets.
Which Policies Are Available to Stimulate Growth?
Since the growth deceleration has both cyclical and structural components, both cyclical and structural policies need to be employed, but their relative importance varies across countries. To the extent that the slowdown reflects, at least in part, a cyclical deceleration, expansionary fiscal and monetary policies could support growth.
- Fiscal policy. Crisis-related fiscal stimulus, both during the crisis and in its wake, has reduced the manoeuvring space in several EM. Persistently low oil prices have further narrowed fiscal policy room in most oil-exporting countries but widened it in some oil-importing countries. Infrastructure investment can be a particularly effective instrument for fiscal stimulus to help lift activity and boost employment. However, the effectiveness of stimulus measures depends on the availability of fiscal space (World Bank 2015).
- Monetary policy options diverge between commodity-importing and commodity-exporting emerging markets – while most of the latter have limited monetary policy room to maneuver, some in the former group should have some space to counteract shocks and stimulate activity. In commodity-exporting emerging markets, depreciating currencies have increased inflation pressures and weakened balance sheets with foreign exposures. In oil-importing countries, the drop in oil prices has reduced inflation and allowed central banks to cut rates.
- Structural reforms could mitigate the sources of the growth slowdown in the medium and long term. Since the 2008 Global Crisis, emerging markets’ record with respect to structural reforms has been mixed. Although there has been progress in strengthening infrastructure and reducing administrative obstacles in some emerging markets, governance reforms have been lagging. Corruption and infrastructure gaps remain key obstacles to doing business in many emerging markets. Policies to improve the investment climate, enhance the functioning of labour markets, and raise human and physical capital could boost productivity.
Emerging Markets at a Crossroads
Emerging markets have come a long way over the past two decades – they have been able to improve their macroeconomic policy frameworks, reduce debt and inflation levels, diversify their production and exports, and establish stronger global trade and financial linkages. In a nutshell, the emerging markets of today are surely not the crisis-prone emerging markets of the 1980s or 1990s.
However, after enjoying years of strong growth, emerging markets find themselves at a crossroads. While the growth slowdown since 2010 could simply be a rough patch, it could also signal the start of an era of slow growth given the persistent nature of the factors that have driven the slowdown so far. In fact, repeated downgrades in long-term growth expectations suggest that the slowdown might not be simply a pause, but the beginning of an era of weak growth for emerging markets. In light of the significant global risks going forward, emerging markets urgently need to put in place an appropriate set of policies to address their cyclical and structural challenges and promote growth.
M Ayhan Kose, Director of the Development Prospects Group, World Bank Group
Franziska Ohnsorge, Lead Economist in the Development Economics (DEC) Vice Presidency, World Bank
Lei (Sandy) Ye, Economist in the Development Prospects group, World Bank
Annunziata, M (2013) “India and the Emerging Market crisis”, VoxEU.org, 1 Sept.
Armstrong, A, F Caselli, J Chadha and W den Haan (2015) “China’s growth slowdown: Likely persistence and effects”, VoxEU.org, 1 Sept.
Didier, T, M A Kose, F Ohnsorge and L S Ye (2015) “Slowdown in Emerging Markets: Rough patch or prolonged weakness?” Policy Research Note 4, World Bank, Washington, DC.
Munyo, I and E Talvi (2013) “Are the golden years for Latin America over?” VoxEU.org, 7 Nov.
World Bank (2015) Having space and using it: Global economic prospects, January, Washington, DC: World Bank.
World Bank (2016) Global economic prospects January 2016, Washington, DC: World Bank.