Global recovery brings opportunities for emerging markets 18.01.

2018 08'47

Opinion Global economic growth

Global recovery brings opportunities for emerging

markets
A policy push to improve education and productivity can stop a slowdown in
growth

MARTIN WOLF

Martin Wolf
JANUARY 16, 2018

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.

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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.)

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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.

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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.

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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.

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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.

martin.wolf@ft.com

Copyright The Financial Times Limited 2018. All rights reserved.

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