Emerging Challenges

• Author: Min Zhu
• Position: Special Advisor to the IMF’s Managing Director.

Straight Talk

In THE WAKE of the recent crisis, a two-speed recovery shifted global economic growth from advanced to emerging and developing economies.

While gross domestic product (GDP) in advanced economies grew on average 3 percent in 2010, emerging and developing economies grew 7.2 percent. The IMF forecasts that the two-speed trend will continue this year. Advanced economies are projected to grow 2.5 percent and emerging and developing economies 6.5 percent, their consumption surging too. In absolute terms, emerging and developing economies will consume $1.7 trillion more in goods and services this year than last year.

Naturally, the rapid growth in emerging markets is swiftly lifting their importance in the global economy. They account for nearly two-thirds of the total growth in global output in the past two years, compared with one-third in the 1960s. Their contribution to foreign trade is also large and increasing, even though advanced economies trade almost twice as much.

The growing heft of emerging market economies is part of a long-term trend. In each of the past five decades, the growth rate of emerging and developing economies exceeded that of advanced economies—at times by a large margin. As a result, at the end of last year emerging and developing economies accounted for 48 percent of global output (measured in terms of purchasing power parity—using the exchange rate at which the currency of one country must be converted into that of another country to buy the same amount of goods and services in each country).

The trend may well continue for a while (see chart). The overall economic conditions in emerging economies are quite favorable: relatively small fiscal deficits, manageable public debt, stable banking systems, low cyclical unemployment, and strong growth momentum. In contrast, many advanced economies are facing serious challenges that stem from big government deficits, large public debt, problems in their banking systems, high unemployment rates, and weak growth. In addition, recent structural changes in emerging economies support the three key drivers of growth: the labor force is growing at a rapid pace and populations are urbanizing, investment is growing with support from ample foreign capital, and productivity is increasing as production moves up the value-added chain. If current trends continue, in two decades annual global output will more than double, from $78 trillion to $176 trillion (in todayâs money)...