Emerging Markets Need ‘Second Generation’ of Reforms

Emerging markets more resilient compared to earlier crises

But changing global conditions are exposing problems in emerging markets

Next generation of reforms vital for lasting growth

At “Emerging Markets: Restoring the Momentum,” a group of experts observed that most emerging economies have reaped substantial benefits over the past decade from cheap capital, high commodity prices, and strong growth in China.

But a tightening in global financial conditions in recent months is exposing a divergence in these economies—some have strengthened economic fundamentals, while others simply rode the wave of good fortune.

Thanks to reforms pursued after the financial crises of the 1990s, many emerging economies are now more resilient and better able to avert any problems that arise as a result of a reversal of the positive external conditions. In order to boost their growth potential, however, these countries may now need to pursue a second generation of reforms, the panelists said.

“It is important for policymakers to recognize the changing dynamics of the global economy and design economic policies accordingly,” said Naoyuki Shinohara, IMF Deputy Managing Director.

Joining Shinohara on the panel were Tim Adams, head of the Institute for International Finance; Luis Miguel Castilla, Finance Minister of Peru; and Nouriel Roubini, Co-founder and Chair of Roubini Global Economics.

Cyclical or permanent?

It is difficult to quantify how much of the slowdown in emerging markets is permanent or temporary, panelists said. Some of the factors affecting the prospects of emerging markets include the slowing of China, the end of the commodity price boom, and the tapering of unconventional monetary policies in some advanced economies. “How much of these factors is structural and how much is cyclical is ambiguous,” said Roubini.

The good news, he said, is that emerging markets have become more resilient in recent years, with a “war chest” of reserves, more flexible exchange rates, and stronger financial systems. But policy decisions will not be easy, he cautioned: “Whether you tighten monetary policy or ease it, each choice has its tradeoffs.”

Castilla observed that Peru was set to grow at rates over 6 percent—double the Latin American average—over the next few years. With the changing global circumstances, the question is how to maintain this momentum in the future, and that entails reforms, he said.

His country is in a better position than its neighbors...