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International Monetary Fund World Economic Outlook October 2012 Resilience in Emerging Market and Developing Economies: Will It Last? Abdul Abiad, John Bluedorn, Jaime Guajardo, and Petia Topalova with support from Angela Espiritu and Katherine Pan EMDEs have done well over the past decade, and through the global crisis 8 Contribution to Growth in World Real GDP per Capita Growth of Real GDP per Capita 5 4 6 3 4 1 0 Percent Percent 2 2 0 -2 -4 -1 Emerging Market and Developing Economies Emerging Market and Developing Economies Advanced Economies Advanced Economies -2 World Growth -6 1990 1993 1996 1999 2002 Source: World Economic Outlook database. 2005 2008 2011 1990 1993 1996 1999 2002 2005 2008 2011 -3 1 EMDE resilience has improved since the 1970s and 1980s. Dynamics of Output per Capita Following Peaks 50s and 60s 140 70s and 80s 1990s Advanced Economies 2000–06 Great Recession Emerging Market and Developing Economies 140 130 130 120 120 110 110 100 100 90 90 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 2 Years In fact, from the 2000s, EMDEs spent more time in expansion—and had smaller downturns—than AEs 50s and 60s 100 70s and 80s 1990s 2000s Median Downturn (Peak-to-Trough Amplitude) Time Spent in Expansion 5 0 80 60 -10 40 Percent Percent -5 -15 20 -20 0 -25 Advanced Economies Source: IMF staff calculations. Emerging Market and Developing Economies Advanced Economies Emerging Market and Developing Economies 3 While AE growth in expansion has fallen over time, EMDE growth in expansion has been more stable. 50s and 60s 5 70s and 80s 1990s 2000s Median Growth in Real GDP per Capita during Expansion Percent 4 3 2 1 0 Advanced Economies Source: IMF staff calculations. Emerging Market and Developing Economies Emerging Market Economies Low-income Countries 4 Unpacking further, what factors are associated with greater resilience? We look at three broad areas: • External and domestic shocks • Policy frameworks and policy space • Structural characteristics Analytical approach: Look at how these factors affect the length of expansions and the speed of recoveries using standard tools of duration analysis • Bivariate – consider factors one-by-one • Multivariate – consider multiple factors simultaneously 5 Shocks, both external and domestic, tend to bring EMDE expansions to an end… Average Probability of Expansion Coming to an End Without shock EXTERNAL SHOCKS With shock Spike in global uncertainty* Large rise in U.S. real interest rates* Recessions in AEs* Sudden stop in capital flows* Terms-of-trade bust* DOMESTIC SHOCKS Banking crisis* Credit boom* 0 5 10 15 20 25 30 35 Percent Source: IMF staff calculations. Note: Statistically significant differences at the 10 percent level are denoted by starred labels. 6 …but improved policy frameworks and enhanced policy space help prolong expansions, and hasten recoveries… Effects of Policies on Expansion Duration Without characteristic Effects of Policies on Speed of Recovery With characteristic POLICY FRAMEWORKS Without characteristic With characteristic POLICY FRAMEWORKS Inflation targeting* Inflation targeting* Countercyclical fiscal policy* Countercyclical fiscal policy* Nonpegged exchange rate* Nonpegged exchange rate POLICY SPACE POLICY SPACE Low inflation* Low inflation* Fiscal surplus* Fiscal surplus Low public debt Low public debt* Current account surplus* Current account surplus* Low external debt* Low external debt* High reserves* High reserves* 0 2 4 6 8 10 12 14 16 Years 0 2 4 6 8 10 12 14 16 Years Source: IMF staff calculations. Note: Statistically significant differences at the 10 percent level are denoted by starred labels. Recovery is defined as the number of years required to get back to pre-downturn levels of per capita output. 7 …while structural characteristics are more of a mixed bag, with fewer robust relationships. Effects of Structural Characteristics on Expansion Duration Effects of Structural Characteristics on Recovery Duration Without characteristic With characteristic Without characteristic Trade openness Trade openness* Trade liberalization Trade liberalization High intra-EMDE exports High intra-EMDE exports* High financial integration High financial integration* High capital account openness High capital account openness* High FDI flows* High FDI flows* Low income inequality* Low income inequality With characteristic 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 Source: IMF staff calculations. Note: Statistically significant differences at the 10 percent level are denoted by starred labels. Recovery is defined as the number of years 8 required to get back to pre-downturn levels of per capita output. Improved performance from the 1980s to the 2000s has been mainly due to policies and policy space Contribution to Change in Expected Mean Duration of Expansions from 1980s to 2000–07 Expected Mean Duration of Expansions 50 18 40 15 12 20 9 10 Years Percent 30 6 0 -10 3 -20 0 External shocks Domestic shocks Source: IMF staff calculations. Policies Structure Total 1980s 1990s 2000–07 2008–09 2010–11 AE Crisis Scenario 9 Concluding remarks EMDE resilience is not a recent phenomenon; it has been building over many years. Not just in EMs, but low-income countries as well Better policymaking has a lot to do with it But resilience cannot be taken for granted: • These economies remain vulnerable to external and domestic shocks • Policy space, partly used up in response to the 2008-09 crisis, needs to be rebuilt • Improvements in policymaking (e.g., greater ER flexibility, more countercyclical policies, inflation targeting) should be maintained 10 It is not just a commodity story… Dynamics of Output per Capita Following Peaks 50s and 60s 130 70s and 80s 1990s Commodity Exporters 2000–06 Noncommodity Exporters Great Recession 130 120 120 110 110 100 100 90 90 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 12 Years …nor is it only for the largest EMDEs. Dynamics of Output per Capita Following Peaks 50s and 60s 130 Largest EMDEs1 70s and 80s 1990s 2000–06 Other EMDEs (excluding the largest) Great Recession 130 120 120 110 110 100 100 90 90 80 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 13 Years 1Refers to the 30 largest emerging market and developing economies based on their average real GDP over the sample period. Among EMDEs, EMs did better from the 1990s, while LICs improved most from the 2000s. Dynamics of Output per Capita Following Peaks 50s and 60s 140 70s and 80s 1990s Emerging Market Economies 2000–06 Low-income Countries Great Recession 140 130 130 120 120 110 110 100 100 90 90 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 14 Years Among regions, EMD Asia and Latin America have seen the most dramatic improvements. Dynamics of Output per Capita Following Peaks 50s and 60s 140 70s and 80s 1990s Emerging and Developing Asia 2000–06 Latin America Great Recession 140 130 130 120 120 110 110 100 100 90 90 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 15 Years Sub-Saharan Africa also improved, but mostly in the 2000s. CIS-EM Europe was derailed by the crisis. Dynamics of Output per Capita Following Peaks 50s and 60s 140 70s and 80s 1990s Sub-Saharan Africa 2000–06 Great Recession Commonwealth of Independent States and Emerging Europe 140 130 130 120 120 110 110 100 100 90 90 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 Years 80 Peak t + 1 t + 2 t + 3 t + 4 t + 5 t + 6 t + 7 t + 8 t + 9 t + 10 16 Years What is behind the gains in EMDE resilience? Higher steady-state growth and lower variability 50s and 60s 4.0 Median Steady-State Growth 70s and 80s 90s and 2000s 5.0 Median Growth Variability 4.5 3.5 4.0 3.0 2.5 Percent 3.0 2.0 2.5 Percent 3.5 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Advanced Economies Source: IMF staff calculations. Emerging Market and Developing Economies Advanced Economies Emerging Market and Developing Economies 17 Why has performance improved? Some shocks have become less frequent, others more frequent… Relative frequency of shock in EMDEs (percent) 5 Banking Crises 15 4 12 3 9 2 6 1 3 0 0 120 100 80 60 40 20 0 Spikes in Global Uncertainty 12 10 8 6 4 2 0 Credit Booms Sudden Stops in Capital Flows 120 100 80 60 40 20 0 Recessions in AEs 18 …but EMDE policy frameworks have improved, and policy space has increased. Share of EMDEs with characteristic (percent) 60 Pegged Exchange Rate 50 50 Countercyclical Fiscal Policy 12 30 30 9 20 20 6 10 10 3 0 0 0 100 High International Reserves 100 80 80 60 60 40 40 20 20 0 0 Inflation Targeting 15 40 40 18 Low Public Debt 90 Single-Digit Inflation 60 30 0 19 Structural factors are mixed – some are more supportive, others less so. Share of EMDEs with characteristic (percent) 120 100 80 60 40 20 0 High Trade Openness 120 100 80 60 40 20 0 120 100 80 60 40 20 0 High Financial Integration 90 60 30 0 High Intra-Emerging Market and Developing Economies Trade High Net Foreign Direct Investment 70 60 50 40 30 20 10 0 Low Income Inequality 20 Mixed patterns in other factors Relative frequency of shock in EMDEs (percent) 35 30 25 20 15 10 5 0 Terms-of-Trade Busts 80 60 Spikes in U.S. Real Short-Term Interest Rate 40 20 0 Share of EMDEs with characteristic (percent) 50 40 30 20 Current Account Surplus 80 60 40 10 20 0 0 Low External Debt 30 25 20 15 10 5 0 Fiscal Surplus 21 What Ends Expansions? Expansions Explanatory Variable All Years Z statistic Pre-1990 Z statistic Post-1989 Z statistic 1 Implied S&P 100 Volatility (VXO) 0.951*** 0.981 0.943*** [-4.179] [-0.985] [-4.565] U.S. Ex Ante Real Interest Rate 0.956 0.993 0.835*** [-1.461] [-0.158] [-3.479] Terms-of-Trade-Bust Indicator 0.968 0.802 1.134 [-0.214] [-1.034] [0.740] Sudden Stop (capital inflows) Indicator 0.590*** 0.497* 0.841 [-2.927] [-1.885] [-1.254] Advanced Economy Recession Indicator 0.642*** 0.668** 0.680* [-4.074] [-2.420] [-1.911] Credit Boom during Past Three Years 0.616*** 0.591*** 0.705*** [-3.913] [-2.621] [-2.610] Banking Crisis Indicator 0.550*** 0.504*** 0.538*** [-3.376] [-3.302] [-2.830] Single-Digit Inflation Indicator 1.473*** 1.574** 1.276** [3.185] [2.474] [2.102] Low Public Debt to GDP Indicator 1.009 0.998 1.019 [0.0713] [-0.0117] [0.132] International Reserves to GDP 1.009*** 1.006 1.004 [2.866] [1.289] [0.903] Income Inequality (Gini coefficient) 0.986** 0.976*** 0.997 [-2.144] [-2.833] [-0.459] Trade Openness (exports plus imports to GDP) 0.999 1.001 1.000 [-0.451] [0.373] [-0.170] Financial Openness (external assets plus liabilities to GDP) 0.999*** 0.999*** 1.000 [-3.121] [-4.840] [-0.549] Observations 1,264 Number of Episodes 188 Number of Exits 126 Number of Economies 75 Weibull Shape Parameter 1.516 1.408 2.277 Z statistic of Shape Parameter 6.829 3.258 2.928 Log Likelihood -103.0 -88.1 Model Chi-Squared p Value 0.000 0.000 Source: IMF staff calculations. Note: Exponentiated coefficients shown are time ratios, which indicate whether the variable tends to shorten (less than 1) or lengthen (greater than 1) the expected time-in-episode. Z statistics are given in brackets underneath the coefficient estimates. A negative z statistic indicates that the associated variable tends to shorten an episode; if the z statistic is positive, it tends to lengthen an episode. *, **, and *** denote significance at the 10 percent, 5 percent, and 1 percent levels, respectively. 1VXO = Chicago Board of Exchange S&P 100 volatility index. Across regions and groups, some differences in drivers of improved resilience, but overall similar. Contribution of Shocks, Policies, and Structure to the Length of Expansions Emerging and Developing Asia 50 Latin America 40 40 30 30 20 20 10 10 0 0 Total Policies Domestic shocks External shocks Total Structural characteristics Source: IMF staff calculations. Structural characteristics -20 Policies -20 Domestic shocks -10 External shocks -10 Percent Percent 50 23 Across regions and groups, some differences in drivers of improved resilience, but overall similar. Contribution of Shocks, Policies, and Structure to the Length of Expansions Sub-Saharan Africa Heavily Indebted Poor Countries 50 40 40 30 30 20 20 10 10 0 0 Total Policies Domestic shocks External shocks Total Structural characteristics Source: IMF staff calculations. Structural characteristics -20 Policies -20 Domestic shocks -10 External shocks -10 Percent Percent 50 24 And it’s not just commodities… Contribution of Shocks, Policies, and Structure to the Length of Expansions Commodity Exporters 50 Noncommodity Exporters 40 40 30 30 20 20 10 10 0 0 Total Policies Domestic shocks External shocks Total Structural characteristics Source: IMF staff calculations. Structural characteristics -20 Policies -20 Domestic shocks -10 External shocks -10 Percent Percent 50 25