Emerging economies face a longer spell of sluggishness than thought

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Emerging markets face their fifth consecutive year of slowing growth and a possibly longer period of sluggish performance than previously thought, as the U.S. Federal Reserve considers an imminent rise in interest rates ahead of 2016, the World Bank said.

Since 2010, emerging market growth has been buffeted by global headwinds such as weak international trade, slowing capital flows, and slumping commodity prices, external challenges which have compounded domestic problems including blunted productivity and bouts of political uncertainty, it said in a new policy research note, Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness? 

“After enjoying years of enviable economic performance, emerging markets are coming under strain, with a marked divergence in growth among them,” said World Bank Chief Economist and Senior Vice President Kaushik Basu. “As some of these economies slow down, the goal of eradicating extreme poverty will become harder as it burrows in and becomes more concentrated in regions most affected by conflict.”

The slowdown comes after a golden period of expansion for emerging markets. In the two decades beginning in the early 1980s, emerging markets almost doubled their contribution to world GDP, acting as the main engine of global economic expansion, and accounting for about 60 percent of global growth during 2010-14, the report said.

However, emerging market growth has been fading steadily since 2010, slipping from an average 7.6 percent in 2010 to a projected less than 4 percent this year. China, the Russian Federation, and South Africa have all logged three consecutive years of slowing growth, it aded.

“The emerging market economies of today are surely not the crisis-prone countries of the 1980s or1990s,” said Ayhan Kose, Director of the World Bank’s Development Prospects Group and co-author of the new report.

“However, given the persistent factors that have driven the slowdown so far, and the significant global risks going forward, emerging markets will want to adopt policies to promote growth as quickly as possible,” he added.

A Bank statement on the report said countries could counter the growth slowdown in different ways, depending on the causes of the weaker growth and the policy tools available to them Limited space for counter-cyclical policies in many emerging markets suggest that structural reforms will be an important ingredient of any policy response.

“Structural reforms will be key to kick-start growth in emerging markets,” said Franziska Ohnsorge, World Bank Global Macroeconomic Trends Team manager and co-author. “Particular emphasis should be given to improvements in governance, which can lift growth considerably.”

The slowdown brings serious risks. One notable concern is that a spike in financial volatility could halt or reverse capital flows to emerging markets, which in turn could stop growth in its tracks, and hamper global and national efforts to create jobs, raise incomes, and further reduce extreme poverty and boost shared prosperity, according to the report.

 

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