Optimists have pointed to improved policymaking in these economies, and to their increased “policy space”—room to respond to shocks without undermining sustainability. But skeptics note that these economies’ recent good performance has been supported by factors that are prone to reversal, such as strong capital inflows, rapid credit growth, and high commodity prices.
The IMF study suggests some of the optimism is warranted. The chapter studied economic expansions and downturns in more than 100 emerging and developing economies over the past 60 years.
The researchers found that the resilience of emerging and developing economies is not a recent development, but the result of steady gains in performance over the past two decades. These economies are now spending more time in expansion, and their downturns and recoveries have become shallower and shorter (see Chart 1).
In fact, the past decade was the first time that emerging and developing economies spent more time in expansion, and had shallower downturns, than advanced economies. This was true not just for emerging markets, but for low-income countries as well.
The authors cautioned, however, that these economies are not immune to shocks, either external or domestic. “Among external shocks, recessions in advanced economies and ‘sudden stops’ in capital inflows have the most pronounced effects,” said Jaime Guajardo, one of the chapter’s authors. “These shocks double the likelihood that expansions in emerging and developing economies will come to an end. The effect of domestic shocks is just as strong, if not stronger—credit booms make it twice as likely that an expansion becomes a downturn by the following year, and banking crises make it three times as likely.”
So if shocks can easily derail expansions in emerging and developing economies, what accounts for their improved performance? Part of the improvement is because some of these shocks are less common now than in past decades, the researchers found. But the bulk of the improvement is due to better policies (see Chart 2).
“Many emerging and developing...