Roads Less Traveled: Growth in Emerging Market and Developing Economies in a Complicated External Environment

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April 10, 2017/IMF

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After a remarkable period of synchronized acceleration in the early 2000s and broad resilience immediately following the global financial crisis, growth across emerging market and developing economies in recent years once again displays heterogeneity—a mix of tapering, standstills, reversals, and continued strength in some cases.

This change has taken place against a backdrop of fading external tailwinds, including waning potential growth in advanced economies, slowdown and rebalancing in China, and a shift in the commodity cycle that has affected commodity exporters. Together with a risk of protectionism in advanced economies and tighter financial conditions as U.S. monetary policy normalizes, these changes make for a more challenging external environment for emerging market and developing economies going forward.

What are the implications of this environment for medium-term growth in emerging market and developing economies? The still-considerable income gaps in these economies vis-à-vis those in advanced economies suggest room for catch-up and thus favorable prospects for maintaining relatively strong potential growth in emerging market and developing economies over the medium term, even if there is a persistent shift in some key external conditions.

The historical record suggests, however, that steady, sustained catch-up growth spurred by income gaps relative to advanced economies is not automatic (Pritchett 2000; Hausmann, Pritchett, and Rodrik 2005; Jones and Olken 2008; Berg, Ostry, and Zettelmeyer 2012).

Growth across emerging market and developing economies over time instead exhibits episodes of accelerations and reversals, with a possible role for external conditions in influencing the patterns. Understanding which policies emerging market and developing economies can deploy to maintain steady growth and avoid reversals as the external environment becomes less supportive is critical for improving living standards in those economies and for lifting global growth.