For some time now, growth in major emerging economies has slowed down extraordinarily. Chinas economy seems to continue softening; Goldman sees growth in China slowing to 7 percent in the next decade and Fitch has cut Indias growth forecast to less than 6 percent.
Once the hubs of expansion, these emerging giants are now seen to lose some of their buoyancy to the global situation.
This is what IMF has warned about in its release of analytical chapters of the World Economic Outlook (WEO). The viewpoint is particularly relevant at present because the global recovery remains slow and bumpy, and there are many risks facing the emerging and developing economies, both external and domestic.
The resilience of the emerging markets and developing economies to external and domestic shocks has been remarkable, especially post-2008 crisis. Chapter 4 of the WEO looks at growth and downturns in more than 100 emerging and developing economies over the past 6 decades. Compared to the advanced economies, these economies have been spending more time in expansion and their downturns and recoveries have been shallower and shorter than the former. And a noteworthy observation is that resilience has not been only an emerging market development like in China and India, but also that of the low-income economies and non-commodity exporters.
The study behind the outlook suggests that the bulk of the expansion, about 60 percent, came from better policy making and more room for policy adjustments by the emerging and developing economies. Many of these economies have adopted flexible exchange rates and inflation targeting. Fiscal and monetary policies have evolved to become more counter cyclical.
This, by no means however, indicates that the emerging and developing economies have become immune to the domestic and external shocks. A question that tries to find its answer in the latest forecast is whether these economies will be able to sustain their buoyancy in the future.
Among external shocks, IMF has doubled the likelihood that expansion in these economies would come to a halt with the recession in advanced economies. Among domestic shocks, credit and banking boom can make it twice and thrice as likely respectively, that there will be a downturn in expansion.
So what could stop all this from becoming reality? Emerging economies are a pretty varied group and have had relatively better policy space. The focus of the Funds outlook has entirely revolved around building and restoring the policy space as done during 2008-09 crises. All tools like interest rates, spending, fiscal deficit and inflation need to be managed well.
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