Last December, in a post on the future of global growth, I posed a set of questions related to the future performance of emerging markets. Will catch-up growth be sustained at pre-GFC rates or will it continue but at a slower pace, reflecting a tougher external environment? Or will the 'convergence' process stall altogether? The future of emerging market growth is also a recurring element in my 13 for 2013 series on the outlook for the world economy.
One way to approach these questions is to think about the difference between good luck and good policy. If emerging markets' success in the pre-GFC period was mainly a product of good luck (for example, due to an unusually convergence-friendly international environment) then we might expect that a less friendly international environment will see that luck run out, with growth suffering accordingly.
Alternatively, if strong performance was largely driven by good policies, then provided those policies are sustained, we should be more optimistic about emerging markets' growth prospects in the post-crisis era.
This important distinction between good policy and good luck is highlighted in a nice paper by Easterly, Kremer, Pritchett and Summers published in the early 1990s. Country characteristics and policies such as educational attainment and political stability are often thought to be among the key determinants of economic growth.
But the paper's authors pointed out that, while all these factors have tended to be relatively stable over time, growth rates have tended to be much more volatile, making it less likely that the former were key drivers of the latter. Instead, they found that shocks (especially shocks to the terms of trade) tended to be as important as policy in determining growth performance.
More recently, economists at the IMF have looked at the resilience of emerging markets and developing economies over the past two decades. The good news is that they find that resilience – as measured by the ability both to sustain economic expansions and to recover rapidly from recessions – has increased markedly in these economies. In particular, for the first time, the past decade saw emerging and developing economies spend more time in expansion and have smaller downturns than advanced economies.
The Fund economists have a go at estimating the source of this improved resilience, and put it down to a combination of better policymaking and increased 'policy space' (that is, more room to respond to adverse shocks via fiscal and monetary policy) as well as to less frequent shocks. They estimate that better policies and more policy space account for about three-fifths of the improved performance in emerging markets, and fewer shocks for about two-fifths. In other words, both good policy and good luck have played a role, with the former being more important.
The same message comes from the observed response of emerging markets to the shock of the crisis itself. So, for example, these World Bank economists point out that, although the GFC saw emerging economies suffer declines in real GDP growth that were as large or even larger than the falls in developed economies, this was actually good news, as in the past, emerging economies have typically fared much worse than their developed economy counterparts. Again, they identify one of the reasons for this shift as an improvement in the quality of economic policymaking.
The good news, then, is that there is evidence of an improvement in the quality of emerging market policies, and this is reflected in increased economic resilience. However, the same evidence also confirms that emerging markets remain vulnerable both to external shocks (such as slower growth in the developed world or spikes in global uncertainty and risk aversion) and to homegrown problems including credit booms and banking crises.
Photo by Flickr user sean_carney.