Beyond Borders: Growth Challenges for Emerging Markets
IMF Blog, January 13, 2014
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- Authors: Alexander Culiuc, Kalpana Kochhar
- Published: January 13, 2014
Main findings on external environment and growth
- Emerging market economies have been vulnerable to external developments, illustrated by market volatility after the U.S. Federal Reserve announced the eventual tapering of its asset purchase program in May.
- The supportive external environment of the pre-2008 period has weakened: growth in advanced economies is not expected to return to pre-2008 credit-fueled boom levels, and there is little evidence of another commodity boom.
- Using a large database covering over three decades, the authors estimate that the combination of higher interest rates, lower commodity prices, and lower growth in advanced economies are likely to shave off around 1 percent of growth for an emerging market economy in the middle of the range in terms of trade and financial openness.
- The magnitude of the impact varies across countries depending on trade and financial openness and policy choices.
Quantified relationships between external shocks and emerging market growth
- A representative emerging market economy: growth would decline by around ¾ percent for each percent of lower growth in its trading partners.
- Financial integration effect: a one percentage point increase in U.S. real interest rates shaves off around 0.1 percent of growth in emerging markets.
- Terms-of-trade shocks (sudden changes in the price of imports relative to exports) have important medium-term effects on exporters of mineral commodities.
Channels and heterogeneity across countries
- Export dependence: countries with a higher share of GDP from exports are more susceptible to lower external demand, which reduces exports and investment in export-oriented sectors.
- Financial openness: more financially integrated countries are more susceptible to higher world interest rates because foreign-financed expenditure can dry up.
- Commodity exporters differ because:
- Mineral commodity exporters have higher concentration in economic activity and capital specific to mineral extraction cannot be quickly reallocated to other sectors.
- Commodity booms often induce spending sprees and borrowing against future revenues; when prices reverse, retrenchment exacerbates swings in activity.
Policy implications and buffering strategies
- Exchange rate regimes:
- Floating exchange rate regimes provide a first line of defense against external shocks by reducing susceptibility to changes in world interest rates.
- Pegged exchange rate regimes with open capital accounts effectively import the anchor country’s monetary policy, transmitting monetary tightening abroad.
- Management of capital flows:
- Episodes of growth financed through deterioration of the current account are followed by periods of lower growth.
- To avoid high current account deficits and credit booms, offset non-resident capital inflows with simultaneous resident capital outflows, which can be drawn upon if inflows reverse.
- The IMF’s World Economic Outlook indicates that counter-cyclical fiscal policies, inflation targeting regimes, flexible exchange rates, and better overall institutions are most conducive to good management of these flows.
- Commodity revenue management:
- For commodity-dependent emerging markets, growth prospects depend on how much of windfall revenues countries saved during boom years.
- Accounting for the effect of public expenditure greatly reduces the medium-term growth reaction to changes in terms of trade.
- A measured response of public expenditure to commodity price increases ensures fiscal sustainability and tames private-sector exuberance, preventing a hard landing when prices fall.
Outlook and next steps
- The next few years present formidable challenges; a return to the very high growth rates of the last decade should not be expected.
- Many emerging market economies have policy tools to navigate a harsher external environment.
- The authors indicate an upcoming paper (following the emerging markets seminar at the 2013 World Bank-IMF Annual Meetings) will provide more detailed analysis.
Alexander Culiuc and Kalpana Kochhar, January 13, 2014 — Beyond Borders: Growth Challenges for Emerging Markets
Content in this bundle
- IMF博客：超越国界：新兴市场面临的增长挑战, 作者：Alexander Culiuc和Kalpana Kochhar,2014年1月13日
- Além das fronteiras: Os desafios de crescimento dos mercados emergentes
- Внешние условия: проблемы роста стран с формирующимся рынком