In its April World Economic Outlook, the International Monetary Fund (IMF) lowered its projections for world economic growth. No surprise there! But, the report also suggested that the traditional correlation between growth in advanced-developed countries and growth in developing countries was weakening. Global trade gains and macroeconomic policy improvements have reduced—but not eliminated—the developing countries’ dependency on the developed world. Now that’s interesting!
The IMF now believes that the pace of world output will slow from 4.9 percent in 2007 to 3.7 percent in 2008 and to 3.8 percent in 2009. All things considered, the slowdown is not that bad, but the IMF cautions that the risks to growth remain weighted on the downside, reflecting primarily the likelihood that further financial turmoil could impair credit availability. This slowdown follows five consecutive years of strong, broadly shared world economic growth.
Notwithstanding attempts to infuse financial markets with liquidity, the IMF expects ongoing spillovers from problems in the U.S. subprime market to constrain credit availability and economic growth in advanced-developed countries. The United States will bear the brunt; it is likely to experience a mild recession in 2008 and a tepid recovery in 2009, even after allowing for recent cuts in the federal-funds-rate target and income-tax rebates. Economic growth in other advance economies, particularly Western Europe, will fall short of potential, but will not contract.
The distinguishing characteristic of the IMF’s recent outlook is how surprisingly well the developing and emerging-market countries are expected to perform despite the weakness in the advanced-developed world. Growth in emerging and developing countries will almost certainly moderate this year to around 6.7 percent from a phenomenally strong 7.9 percent pace in 2007 and will most likely weaken further to 6.6 percent in 2009. Nevertheless, relative to its historic performance, real economic growth among the emerging and developing countries will remain quite strong.
Since 2004, economic growth has been particularly robust across all regions of the developing world, including Africa and Latin America. China alone has accounted for approximately one quarter of the world’s overall growth rate, while Brazil, China, India, and Russia have accounted for approximately one-half, according IMF estimates.
The IMF credits the recent resilience of the emerging and developing countries largely to the productivity gains that these countries have acquired through integrating with the broader global economy. Market reforms within a broad range of developing countries and technological advances have encouraged global companies to unbundle production processes and to access underutilized labor resources in the developing world. These patterns seem particularly strong in China, India, and Eastern Europe. As a consequence, developing and emerging countries are increasingly important competitors in world markets. The IMF estimates that they now account for roughly one-third of all global trade and for more than one-half of the increase in global import volumes since 2000. Moreover, despite recent global financial stresses, trade between the developed and developing world has not dropped off much.
The unbundling of production is also changing the pattern of global trade. Roughly one-half of emerging and developing counties’ exports are now going to other such countries, according to the IMF. This is especially true within Asia. While the IMF expects that exports from Asia to the United States and Europe will slow, the effect will be less debilitating than during previous downturns, because intra-Asia trade is rising relative to trade with the West. As a consequence, even though the emerging and developing countries are opening up, the business fluctuations in advanced economies may now have less of an impact on them than in the past.
The IMF also credits recent strong growth among emerging and developing economies to their improved macroeconomic-policy performance. Country-to-country variation notwithstanding, emerging and developing countries have generally cooled their inflation rates and corralled their fiscal deficits. Public (and private) balance sheets have strengthened. While official and private financial flows into these countries generally have remained strong, many emerging and developing countries have reduced their reliance of foreign borrowing, and their ability to accumulate official foreign-exchange reserves provides them an insurance pool against financial turmoil.
Despite the optimistic outlook for the emerging and developing world as a whole, the IMF does sound an important cautionary note. Although these countries are reducing their business-cycle dependency on the advanced world, they have not completely broken it. Spillover effects are still significant and, as the IMF emphasizes, they may be ’nonlinear.’ That is, they may be fairly benign when economic growth in the advanced counties slows, but wickedly severe when the developed world slips into recession.