Global recovery brings opportunities for emerging markets
A policy push to improve education and productivity can stop a slowdown in growth
Martin Wolf
The world economy is enjoying a synchronised recovery. This is good news for emerging and developing countries. It is also an opportunity. A slowdown in the potential rate of growth is affecting many of these countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.The World Bank’s latest Global Economic Prospects draws the picture. At market prices, global growth is thought to have been 3 per cent in 2017, with emerging and developing countries reaching 4.3 per cent.
This year it is forecast to reach 3.1 per cent, with that of emerging and developing countries reaching 4.5 per cent.
As always, Asia is expected to grow fastest. Elsewhere, performance is less encouraging.
Commodity-exporting emerging and developing economies are forecast to grow only 2.7 per cent this year, up from 1.8 per cent in 2017. The Latin American and Caribbean region is forecast to grow only 2 per cent this year, up from 0.9 per cent in 2017. Brazil is climbing only slowly out of a deep recession. Growth in Sub-Saharan Africa and the Middle East and north Africa is also forecast to remain slow, at 3.2 and 3 per cent, respectively.The good news, however, is that global conditions are conducive to widely-shared growth. Commodity prices have rebounded. Trade has recovered, supported by the strengthening of investment. The volume of world trade is estimated to have grown 4.3 per cent last year and is forecast to grow 4 per cent this year. Capital flows to emerging economies strengthened in 2016 and again in 2017. The recent increase has been in portfolio flows and other lending, but more than half is in the more stable (and more beneficial) form of foreign direct investment. (See charts.)
As the report rightly points out, the evident downside risks of “financial stress, increased protectionism, and rising geopolitical tensions” threaten emerging and developing countries.
The biggest have room to respond to untoward external developments. China and India have shown the ability to manage adverse external developments. The same is not true for most other emerging and developing countries, even large ones such as Brazil or Russia. These countries may hope for a benign external environment; but if another crisis comes, they are likely to be hurt.What they can do is improve their underlying dynamism, which should also increase resilience. It is upon this that the report focuses. The slowdown in potential growth of the high-income countries due to ageing and the weakening growth of productivity is well known. The not dissimilar slowdown in emerging and developing countries is less so. Yet that slowdown is more disturbing.
Emerging and developing countries have greater need for fast growth than high-income countries, because they are still so poor. Moreover, they should have a larger potential for growth, because of their ability (at least in theory) to catch up on the productivity levels of high-income countries.Yet the potential rate of growth of emerging and developing countries is slowing. The World Bank forecasts potential growth of emerging and developing economies at an average of 4.3 per cent between 2018 and 2027. This is 0.5 percentage points below the 2013-17 average and 0.9 percentage points below its average of a decade ago. Moreover, this slowdown is widely shared: between 2013 and 2017 potential growth was below its longer-term average in almost half of all emerging and developing countries.
The slowdown in these economies partly reflects ageing, as is true in high-income countries.
Weak investment and slower growth of “total factor productivity” — a measure of the output generated by a given quantity of labour and capital — also drive the slowdown in these countries’ potential growth.Without significant policy changes, this slowdown is very likely to occur. Ageing of the population will proceed in most emerging and developing countries. Some of the slowdown of growth in total factor productivity might also be inevitable. It might have slowed because the information and communications technologies of the 1990s, especially the internet, have matured. The slowdown in the unbundling of production across borders may also be weakening the diffusion of technology and other know-how. Ageing workforces may be less adaptable. The growth of total factor productivity is also linked to the growth of investment. But, since 2010, investment growth has slowed sharply in emerging and developing countries, from double-digit rates in the wake of the global financial crisis to a post-crisis low of just 3 per cent in 2016.
Yet determined policy might offset the forecast slowdown in potential growth. Improving the quality of the labour force is possible, for example. Completion rates in secondary education are closing on levels in high-income countries. But substantial room exists for further improvement in the quality and quantity of education, especially at the tertiary level, as well as in female participation in the labour force. Transforming the quality of the policy environment and of governmental institutions, not least of the legal system and regulation, might also be very helpful. The outcome should be greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity. Emerging and developing economies should use today’s buoyant global growth to encourage higher investment and make reforms needed to raise productivity growth. They should act now. Economic sunshine never lasts. They should expect stormier weather ahead.
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