Emerging Markets Come of Age

• Author: M. Ayhan Kose and Eswar S. Prasad
• Position: an Assistant to the Director in the IMF's Research Department. is the Tolani Senior Professor of Trade Policy at Cornell University, Senior Fellow and New Century Chair in International Economics at the Brookings Institution, and a Research Associate at the National Bureau of Economic Research.

THE superlative performance of emerging market economies, a group of middle-income countries that have become rapidly integrated into global markets since the mid-1980s, has been the growth story of the past decade. After being beset by various crises during the 1980s and 1990s, emerging markets came into their own during the 2000s, recording remarkable growth rates while keeping inflation and other potential problems largely under control.

Before the global financial crisis of 2008–09, there was a growing sense among investors and policymakers that emerging economies, with their new economic might, had become more resilient to shocks originating in advanced economies. Indeed, empirical evidence indicates that over the past two decades there has been a convergence of business cycles among emerging markets and a convergence among advanced economies, but a gradual divergence of cycles between the two groups—referred to as decoupling. Fluctuations in financial markets have become more correlated across these two sets of countries, but that has not translated into greater spillovers into the real economy, which produces goods and services.

Yet the global financial crisis seemed to put to rest such notions of decoupling. It cast a shadow over the ability of emerging markets to insulate themselves from developments in advanced economies. Still, once the worst of the crisis began to wear off, it became apparent that as a group emerging economies had weathered the global recession better than advanced economies. In many emerging markets, growth rates have bounced back briskly during the past year, and as a group these economies seem poised to record high growth over the next few years (see Chart 1).

This is not to say that all emerging economies did equally well during the global recession. There is significant variation in the degree of resilience they displayed during the financial crisis. And therein lie some important lessons regarding the future growth paths of these economies and the issues they might face.

As emerging markets grow, they will continue to gain importance in the world economy. That economic ascendance will enable them to play a more significant role in improving global economic governance, so long as they employ good policies and intensify reforms that contributed to their resilience during the global recession. All told, emerging markets are in control of their own destiny.

Changing drivers of global growth

The past five decades have witnessed substantial changes in the distribution of world gross domestic product (GDP) across different groups of economies. During 1960–85, advanced economies on average accounted for about three-quarters of global GDP measured in current dollars adjusted for differences in purchasing power parity across countries. This share has declined gradually over time—by 2008–09, it was down to 57 percent. In contrast, emerging markets’ share has risen steadily from just about 17 percent in the 1960s to an average of 31 percent during the period of rapid global trade and financial integration that started in the mid-1980s. By 2008–09, it was close to 40 percent (see Chart 2).

The rising importance of emerging markets becomes even more apparent when their contribution to world output growth is considered.

During 1973–85, advanced economies accounted for about 60 percent of the 3.4 percent annual world GDP growth. Emerging markets contributed a third (the remainder is accounted for by other developing economies). Growth of world GDP averaged 3.7 percent a year during the period of globalization—1986–2007—and the contribution of emerging markets grew to about 47 percent. Advanced economies’ share fell to about...