How Emerging Markets Can Get Their Groove Back

IMF Blog, October 7, 2013

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After a decade of high growth and a swift rebound after the collapse of U.S. investment bank Lehman Brothers, emerging markets are seeing slowing growth.
Their average growth is now 1½ percentage points lower than in 2010 and 2011.
Growth has been slowing in roughly three out of four emerging markets.
Such synchronized and persistent slowdowns typically have only occurred during acute crises in the past.

Cyclical forces:
- Softer external demand.
- Recently tightening financing conditions (after a period of easy financing).
Structural bottlenecks:
- Infrastructure constraints.
- Labor market frictions.
- Power sector weaknesses.
Offsetting factors that had been supportive:
- Supportive domestic macroeconomic policies.
- (Still) favorable terms of trade.
Unexplained component:
- A non-trivial portion of the slowdown remains unexplained, suggesting other common factors affecting emerging markets.

Growth potential is unobservable and may have been overstated after a decade of cheap financing and rising commodity prices that boosted investment and growth.
IMF forecasts for growth five years ahead are down by 0.7 percentage points compared to October 2012.
Market analysts have made similar downward revisions.
Implication: Policymakers need to recognize that emerging markets will likely grow at lower rates than in the past to avoid over-stimulation and the generation of imbalances.

Short-term monetary/fiscal countercyclical demand management will not be sufficient on its own.
Priority areas to generate higher sustainable growth:
- Identify reform priorities to remove supply bottlenecks.
- Boost productivity.
- Move economies up the value chain.
- Push ahead with infrastructure investment.
- Improve the business climate.
Timing and urgency:
- Structural measures take time to implement and the economy responds with natural lags.
- The need for decisive policy action is now to avoid the risk of a lost decade.

Imminent tightening of global interest rates (e.g., U.S. Fed tapering announcement) has led to:
- Large and disruptive capital outflows in some emerging markets.
- Sharper exchange rate depreciation and bond-yield increases in more vulnerable emerging markets (those with high and growing current account deficits and high inflation).
Investors will increasingly differentiate between emerging market countries according to:
- Their policy frameworks.
- The health of their balance sheets.

High-level seminar at the IMF:
- Emerging Markets: Restoring the Momentum seminar.
- Tuesday, October 8, 3:00 p.m. – 4:30 p.m. EST.
- Join the conversation on Twitter using hashtag #EmergingMkt.

Kalpana Kochhar, Roberto Perrelli — October 7, 2013