Emerging Markets Are Exercising Greater Global Sway

IMF Blog, April 9, 2024

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Authors: Nicolas Fernandez-Arias, Alberto Musso, Carolina Osorio Buitron, Adina Popescu
Published: April 9, 2024

Publication date: April 9, 2024.
Authors: Nicolas Fernandez-Arias, Alberto Musso, Carolina Osorio-Buitron, Adina Popescu.
Core message: Growth spillovers from G20 emerging markets have strengthened over the past two decades and are now comparable to those from advanced economies, increasing the need for policymakers to manage cross-border propagation channels.

Over the past two decades, large emerging markets in the Group of Twenty have become much more integrated with global markets and generate larger economic “spillovers” to the rest of the world.
Growth spillovers from domestic shocks in G20 emerging markets have increased over the past two decades and are now comparable to those from advanced economies.
Spillovers are largest from China and now explain just as much of the variation in emerging-market output as those from the United States.
Other G20 emerging markets—such as India, Brazil, Russia, and Mexico—also play an important role in the economic performance of their neighbors.
A decline in productivity in G20 emerging markets can lower global output three times more than would have been the case in 2000 (simulation result from a multi-country multi-sector trade model).
Since China’s accession to the World Trade Organization in 2001, G20 emerging markets have doubled their share of world trade and foreign direct investment and now account for one third of global GDP.
A plausible growth acceleration in these countries could generate positive global spillovers and boost world growth by half a percentage point.

G20 emerging markets have become large importers of manufactured products and large exporters of intermediate goods, notably in manufacturing and mining.
Positive growth surprises in G20 emerging markets boost revenue growth of foreign firms in sectors more dependent on demand from these markets—examples: electrical equipment, machinery, and metal products.
Faster growth in emerging markets such as Indonesia and Türkiye can help foreign firms in sectors more reliant on cheaper inputs.
Import-competition effects from lower-wage countries, such as China and Mexico, appear to dominate in sectors highly dependent on foreign suppliers—for example, textiles and chemicals—leading to direct competition with foreign firms.
Shocks in G20 emerging markets can trigger sizable reallocations of economic activity across countries and sectors.

Most sectors will shrink in response to a broad-based decline in productivity, especially in Asia.
If a productivity decline is concentrated in sectors integrated in global value chains, most manufacturing sectors in the rest of the world will eventually expand—particularly textiles, metals, and electronics—because firms substitute for decreased supply coming from G20 emerging markets.

Employment in countries hit by spillovers adjusts to changing competitive and complementary relationships.
A positive productivity shock in G20 emerging markets can lead to job losses within the same sectors in other countries because of increased competition.
Spillovers that propagate through sectors connected via global value chains tend to generate complementarities and more job opportunities in affected countries.

Policymakers—both in G20 emerging markets and in countries that could be impacted—must understand channels through which slowdowns propagate and be ready to manage greater spillovers.
Structural reforms, especially in labor markets and business regulation, can help sectors that stand to benefit most from reallocation.
Inclusive policies—including targeted fiscal support—should facilitate efficient reallocation of labor across sectors and mitigate harmful distributional impacts of spillovers.
Effective multilateral cooperation and international policy coordination are priorities to manage spillovers and minimize fragmentation risks, including by strengthening the global financial safety net.
Recognize that while a slowdown in China could be especially costly given its manufacturing role and high integration, the growing role of all G20 emerging markets means others can help support the world economy.

This blog is based on Chapter 4 of the April 2024 World Economic Outlook, “Trading Places: Real Spillovers From G20 Emerging Markets.”