Editor’s Note: The vibrant middle-income countries have survived the global recession, but face bumps as they seek to solidify their place in the world economy. In a Finance & Development article, M. Ayhan Kose and Eswar Prasad analyze the changing nature of the world economy given the significant rise and growth of the emerging market economies. Kose and Prasad provide important lessons learned regarding the future growth paths of these economies and the issues these economies might face.
Before the global financial crisis of 2008–09, there was a growing sense among investors and policymakers that emerging economies, with their new economic might, had become more resilient to shocks originating in advanced economies. Indeed, empirical evidence indicates that over the past two decades there has been a convergence of business cycles among emerging markets and a convergence among advanced economies, but a gradual divergence of cycles between the two groups—referred to as decoupling. Fluctuations in financial markets have become more correlated across these two sets of countries, but that has not translated into greater spillovers into the real economy, which produces goods and services.
Yet the global financial crisis seemed to put to rest such notions of decoupling. It cast a shadow over the ability of emerging markets to insulate themselves from developments in advanced economies. Still, once the worst of the crisis began to wear off, it became apparent that as a group emerging economies had weathered the global recession better than advanced economies. In many emerging markets, growth rates have bounced back briskly during the past year, and as a group these economies seem poised to record high growth over the next few years (see Chart 1).
This is not to say that all emerging economies did equally well during the global recession. There is significant variation in the degree of resilience they displayed during the financial crisis. And therein lie some important lessons regarding the future growth paths of these economies and the issues they might face.
As emerging markets grow, they will continue to gain importance in the world economy. That economic ascendance will enable them to play a more significant role in improving global economic governance, so long as they employ good policies and intensify reforms that contributed to their resilience during the global recession. All told, emerging markets are in control of their own destiny.