Are Emerging Markets Still On the Receiving End?
IMF Blog, April 3, 2014
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- Authors: Aseel Almansour, AQIB ASLAM, John Bluedorn, Rupa Duttagupta
- Published: April 3, 2014
Executive summary
- The recent slowdown in emerging market growth is driven "as much by domestic conditions as by external circumstances."
- Emerging markets contribute a significant share of the global economy; their performance increasingly matters for the global outlook.
- Chapter 4 of the April 2014 World Economic Outlook analyzes how external factors have driven growth in emerging market economies in the past 15 years and finds that emerging market growth, while still strong, has been slowing in the last two years.
How external factors influence emerging market growth
- A "1 percentage point increase in the U.S. growth rate typically raises emerging market growth by 0.3 percentage points in the same quarter," with the cumulative effect staying positive beyond one-to-two years.
- Two opposing channels when advanced economies recover:
- Higher advanced-economy growth should boost exports from emerging markets.
- Global capital may flow back from emerging markets to advanced economies to take advantage of higher growth and interest rates.
- Net effect by type of economy:
- For emerging markets that trade more with advanced economies (e.g., Malaysia and Mexico), export gains tend to dominate.
- For emerging markets more open to capital flows (e.g., Chile and Thailand), capital outflows could partly or fully offset export benefits.
- For emerging markets as a whole, the impact of export gains likely outweighs capital-flow outflows.
- When external financing conditions tighten beyond what is explained by the advanced-economy recovery (as in early 2014 market turbulence):
- Capital outflows lead to exchange rate depreciation, which helps export competitiveness.
- Authorities typically raise domestic interest rates to stem outflows, and higher domestic interest rates "hurt growth."
- The analysis suggests "the hit to emerging markets from higher domestic interest rates tends to offset the benefits from the exchange rate depreciation."
External environment versus internal factors
- External factors explain "one-half or more of the growth deviation on average" over the last 15 years, but with important variation across time and countries.
- Historical attributions:
- The sharp downturn at the peak of the global financial crisis was "almost fully accounted for by external factors for most countries."
- Internal factors dominated the strong growth uptake in emerging markets in 2006-07.
- The pullback in growth since 2012 is "largely attributable to internal factors."
- For large or relatively less open economies such as China and India, "internal factors—more than the external environment—mostly explain the fluctuations in growth from the average level over 1998-2013."
- Recent literature corroborates that "constraints from domestic structural factors and policy uncertainty" have become more binding for growth in many larger emerging markets.
China’s role as an external factor
- China, as the world's second largest economy, played an important role in determining growth in other emerging markets.
- Many emerging markets "were able to ride on the coat tails of China’s strong expansion during the crisis."
- "China's recent slowdown has also acted to soften their growth."
Shifting gears: adjusting to a lower level of emerging market growth
- Forecasts of emerging market growth starting in 2007, conditional on external conditions, show that "some of the larger emerging markets have grown at lower rates than expected since 2012."
- This underperformance suggests that "other, mostly internal, factors are holding growth in many emerging markets, including constraints from domestic structural factors."
- If these internal dampening effects persist, "emerging market growth will remain lower for some time," with spillovers to growth in the rest of the world.
Policy implications — "Keeping the house in order"
- Policymakers must remain vigilant and sensitive to external developments because the external environment will continue to have a strong impact on emerging market growth.
- Risks to monitor:
- A sharp tightening in external borrowing rates, without a proportionate improvement in advanced economy growth, would hurt emerging markets.
- "China’s adjustment to a slower, even if more balanced, pace of growth, will inevitably alter prospects for other emerging markets."
- If advanced economies do not recover as currently expected, emerging markets will be affected.
- Priority for policymakers:
- Better understand the role of internal factors suppressing growth.
- Assess whether policies can improve economies’ resilience regardless of the external backdrop.
Are Emerging Markets Still On the Receiving End? — Aseel Almansour, AQIB ASLAM, John Bluedorn, Rupa Duttagupta; April 3, 2014
Content in this bundle
- 新兴市场是否仍受外部条件影响？作者： Aseel Almansour、Aqib Aslam、 John Bluedorn和 Rupa Duttagupta; 2014年4月3日
- 新興市場国・地域は、依然受け入れ先か。: アセル・アルマンスール、アキブ・アスラム、ジョン・ブルードン、ルパ・ドゥタグプタ, iMFdirect ブログ 2014年4月3日掲載
- Chapter 4: On the Receiving End?
- Сохраняется ли пассивная роль стран с формирующимся рынком?
