Emerging Markets Face Tough Climb Back to Past Growth Levels

Structural factors weigh on emerging market growth

External environment less supportive, but impact varies by country

Countries need to rethink growth engines, focus on structural reforms

Emerging Markets in Transition: Growth Prospects and Challenges sheds light on the factors behind last decade’s strong performance in emerging economies and how the ongoing global transitions will affect their prospects going forward. It builds on the April 2014 World Economic Outlook that looked at the role of external and domestic drivers of growth in emerging economies and the discussions that took place during last fall’s conference on the same topic.

The study observes that, despite the changing external environment, sustained growth in these countries is still possible. But emerging markets need to maintain sound domestic policies, place renewed emphasis on structural reforms, and strive to increase productivity.

“Rebounding from the current slowdown and reclaiming the higher growth of the last decade will not be easy,” the authors note. “Early and decisive commitment to tailored reforms will have significant benefits over the longer term.”

The 2000s: A favorable global context, with uneven impact

A confluence of favorable external conditions supported emerging market growth in the 2000s. Growing global demand and expanding supply chains boosted global trade, while lower interest rates in advanced economies eased global financial conditions. The commodity price “supercycle” supported growth in many commodity-exporting emerging and developing countries. And increased trade and financial openness allowed emerging markets to take advantage of these conditions.

However, the benefits from favorable external conditions differed substantially across emerging markets. Growing demand from trading partners added on average half a percentage point to growth in countries that were more open to trade. Easy financing conditions boosted investment and added on average over a third of a percentage point to growth in financially open countries, while high commodity prices supported higher investment and growth in the more commodity-dependent economies (Chart 1).

Many emerging markets also took advantage of the “good times” to strengthen policy frameworks, reduce vulnerabilities, and build policy space. These countries were able to bring down debt, enjoy lower borrowing costs, and adopt more flexible exchange rate regimes that proved crucial when the global...