Main­tain­ing the emerg­ing econ­omy growth

The Pak Banker - - OPINION - Lee Jong-Wha

THE world's emerg­ing economies seem to be los­ing their dy­namism. Coun­tries that only a few years ago were be­ing hailed for their re­silience in the face of a global eco­nomic melt­down are now fac­ing myr­iad chal­lenges, re­flected in sig­nif­i­cantly slower gross do­mes­tic prod­uct (GDP) growth. Is the emerg­ing econ­omy growth en­gine break­ing down?

From 2000 to 2007, an­nual growth in emerg­ing and de­vel­op­ing economies av­er­aged 6.5%. More im­pres­sive, from 2008 to 2010, when the ad­vanced economies were in re­ces­sion or strug­gling through a frag­ile re­cov­ery, they man­aged to sus­tain 5.5% growth. In fact, at the end of that pe­riod, av­er­age growth stood at a very healthy 7.5%.

But then growth be­gan to slow, with the an­nual rate fall­ing to 4% in 2015. Many now ar­gue that the emerg­ing economies are set­tling into a "new nor­mal" of slower growth, and that their days as the key driver of the global econ­omy are over. De­spite their cur­rent strug­gles, it would be pre­ma­ture to write off the emerg­ing economies. For starters, even if th­ese coun­tries' growth rates do not re­turn to pre-cri­sis lev­els, their con­tri­bu­tion to the world econ­omy should re­main sub­stan­tial, given that their share of world GDP in pur­chas­ing power par­ity terms has in­creased sig­nif­i­cantly, from 43% in 2000 to 58% in 2015.

At first, emerg­ing economies were hit by ex­ter­nal chal­lenges, in­clud­ing weak­en­ing world trade, low com­mod­ity prices and tight fi­nan­cial con­di­tions. Global mer­chan­dise trade slowed con­sid­er­ably over the past four years; in the first half of 2015, it con­tracted for the first time since 2009. Oil and metal prices have dropped more than 50% from their 2011 peaks. More­over, the US Fed­eral Re­serve's mon­e­tary pol­icy re­ver­sal, which en­tails a long-de­layed in­crease in in­ter­est rates, com­bined with the neg­a­tive in­ter­est rate poli­cies of the Bank of Ja­pan and the Euro­pean Cen­tral Bank, has caused fi­nan­cial mar­ket fluc­tu­a­tions and left emerg­ing economies vul­ner­a­ble to cap­i­tal flight. Th­ese ex­ter­nal fac­tors could be cycli­cal, but it re­mains to be seen how soon they will pass.

The re­cent emerg­ing econ­omy slow­down is also the re­sult of struc­tural fac­tors. When the emerg­ing economies' growth sto­ries be­gan, the gap be­tween their ac­tual per capita in­comes and long-run po­ten­tial en­abled rapid cap­i­tal ac­cu­mu­la­tion and strong tech­nol­ogy en­abled pro­duc­tiv­ity gains.

But af­ter years of large-scale in­vest­ment, cap­i­tal ac­cu­mu­la­tion has mod­er­ated. Mean­while, as coun­tries move closer to the tech­nol­ogy fron­tier, im­i­ta­tion and adap­ta­tion must give way to gen­uine in­no­va­tion-no easy feat when in­no­va­tive ca­pa­bil­i­ties are lack­ing. So, what can emerg­ing economies do to im­prove their prospects?

For one thing, coun­tries must strengthen their re­silience against ad­verse ex­ter­nal shocks, in­clud­ing through ef­forts to strengthen their own fi­nan­cial sys­tems. To re­duce their vul­ner­a­bil­ity to volatile cap­i­tal flows, they should pro­mote ex­change rate flex­i­bil­ity, se­cure ad­e­quate in­ter­na­tional re­serves and adopt care­fully de­signed cap­i­tal con­trols.

Emerg­ing economies that rely ex­ces­sively on ex­ports need to re­bal­ance their sources of growth. In­vest­ment in pub­lic in­fra­struc­ture, an im­proved in­vest­ment cli­mate and so­cial safety nets could all help to spur higher pri­vate­sec­tor in­vest­ment and house­hold ex­pen­di­ture.

Greater pri­or­ity must also be given to struc­tural sup­ply side poli­cies tar­get­ing pro­duc­tiv­ity growth. First, to strengthen hu­man cap­i­tal, emerg­ing economies must com­ple­ment their progress in ed­u­ca­tional at­tain­ment with ef­forts to im­prove schools' qual­ity, es­pe­cially at the sec­ondary and ter­tiary lev­els.

Se­cond, struc­tural bot­tle­necks must ur­gently be ad­dressed, through the stream­lin­ing of reg­u­la­tions, as well as re­forms to pro­mote com­pe­ti­tion in prod­uct mar­kets and to in­crease the flex­i­bil­ity and ef­fi­ciency of fac­tor mar­kets for labour, fi­nance and land. Emerg­ing economies must lower bar­ri­ers to mar­ket en­try, sup­port busi­ness op­er­a­tions and in­crease ac­cess to fi­nance. Ob­sta­cles to trade and for­eign di­rect in­vest­ment must be re­moved as well.

Fi­nally, emerg­ing economies must work to strengthen their in­sti­tu­tions. As it stands, cor­rup­tion-fa­cil­i­tated by com­plex and bur­den­some reg­u­la­tory en­vi­ron­ments, in­ef­fi­cient tax regimes and weak ju­di­cial sys­tems in­ca­pable of pro­tect­ing in­vestor and prop­erty rights-is per­va­sive in many emerg­ing economies.

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