by M. Ayhan Kose and Eswar Prasad via VoxEU.org
Emerging market economies proved surprisingly resilient during the global crisis, but some of them weathered the crisis better than others. This column argues that there are useful lessons to be learned from their experiences, and that these lessons have implications for securing emerging markets’ long-term growth prospects and responsibilities for global economic and financial stability.
The global recession has thrown up one big surprise – the resilience of emerging markets during the worst of the crisis and their rapid bounce-back to high growth (see for example, Moghadam 2010). As Figure 1 shows, not all emerging markets did as well as those in Asia, but even those in Latin America and Africa did better than expected given their histories of growth collapses and crises when advanced economies went into recession and capital flows dried up.
Figure 1. Emerging markets’ growth bouncing back (growth rate of GDP, % change from a year earlier)
Note: Authors’ calculations. Data for 2010 are based on forecasts in the World Economic Outlook (October 2010). Growth calculations use real GDP growth rates for each country and are weighted by purchasing power parity.
As we argue in our new book (Kose and Prasad 2011), emerging markets have come of age and cemented their roles as key drivers of global growth (see Figure 2). But there are some serious domestic challenges they need to tackle to lock in high growth. They also need to shoulder responsibilities that come with being major players on the world economic stage.
Figure 2. Becoming bigger players in the global economy (Fraction of group GDP relative to world total, in percent)
Note: Authors’ calculations. The values correspond to period averages as a share of world GDP computed using PPP exchange rates. The sum does not equal 100% because not all economies are counted (only advanced and emerging).
Lessons abound
The relative performance of different groups of countries during the crisis validates some elements of macroeconomic orthodoxy.
- A majority of emerging markets ran disciplined fiscal policies in the years leading up to the crisis, with lower levels of government deficits and public debt, on average, than advanced economies.
- This allowed them to aggressively pursue fiscal stimulus to counteract the crisis.
Many of them had also implemented better monetary policy frameworks with a focus on low inflation and flexible exchange rates that act as a shock absorber.
Some of the lessons from the crisis are old ones that remain valid.
- Emerging markets in Eastern Europe that were dependent on foreign finance – especially bank finance – were among the hardest hit during the crisis as they were vulnerable to foreign banks pulling out capital.
This harks back to a long and painful history of large current-account deficits financed through debt flows that brought down some Asian and Latin American countries in the past.
- The notion that insulated financial markets helped some emerging market economies get through the crisis relatively unscathed may well be true.
It will be difficult, however, to make progress on more balanced and equitable growth without better financial systems. This does not mean complete financial liberalisation and creation of markets for exotic financial products. The challenge is simpler –improving banking systems so they effectively intermediate domestic and foreign savings into productive investment, and creating basic financial products that allow firms and households to manage risk.
- Countries that had built up large buffers of foreign exchange reserves appeared to weather the crisis in good shape as they could run down those reserves when foreign capital inflows dried up.
- Yet the apparent lesson – that more reserves are better – is far from obvious. The costs of such self-insurance can be quite substantial. It diverts resources from domestic investment.
There are also harder to measure costs of distortionary policies, such as repressed financial markets, that play a role in building up reserves. Moreover, this is an issue where individual interests of countries collide with collective interests and a coordinated global solution would be more efficient.
Challenges of being global players
In the aftermath of the crisis, there is a striking dichotomy between advanced and emerging economies in the short-term risks and policy challenges that they face.
- Among advanced economies, the major concern is weak growth and impending fiscal pressures. Conventional monetary policy has reached its limits and debt has risen to such high levels that it constrains the scope of fiscal policy.
- In emerging economies, by contrast, growth has rebounded sharply, which means they face rising inflation, surges of capital inflows, and pressures of rapid currency appreciation.
Along with an increase in their economic heft, emerging economies are becoming more important players in setting global priorities. The unofficial anointment of the G20 as the major body determining the global economic agenda has given emerging markets a prominent seat at the table. The same is true in international institutions such as the Financial Stability Board and the IMF, where emerging economies have a much larger say than before.
The global financial crisis presents a unique opportunity for emerging markets to mature in another dimension – taking on more responsibility for global economic and financial stability.
- While emerging markets, such as China and India, remain relatively poor in per capita terms, their sheer overall size makes it important for them to consider the regional and global spillovers of their policy choices.
This will require them to play an active role in guiding international debates on key policy issues, including strengthening global economic governance. It is in their own long-term interest to take the lead on global challenges, from dismantling trade barriers to tackling climate change, rather than focusing narrowly on their own perceived short-term interests.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions they are affiliated with.
References
Ayhan Kose, M. and Eswar S. Prasad (2011). Emerging Markets: Resilience and Growth Amid Global Turmoil, Brookings Institution Press.
Moghadam, Reza (2010), “Emerging market countries and the crisis: How have they coped?”, VoxEU.org, 30 April.
