NEW YORK — Ups and downs in the U.S. economy were once thought to have far-reaching implications for foreign economies, but it now seems that this pattern may be fading. Recent reports from IMF researchers show that Emerging Market and Developing Economies, or EMDEs, have gradually become less susceptible to effects from changes in the U.S. economy over the past two decades.
Why? One reason that explains the stronger immune systems of world economies is their development of higher and steadier growth rates. This means that certain shocks that would have once halted economic progress will now only slow it down. The result of this is prolonged economic expansion and hastened recovery times.
This increased resiliency has been promoted by better economic policies beginning in the early 1990s with inflation reduction. Success in the strengthening of foreign economies has also been attributed to the adoption of countercyclical fiscal policy that offsets economic downturns. Debt reduction, in both the public and private sector, has also helped to stimulate growth while increased exchange rate flexibility has absorbed the shock from changes in the U.S. economy and minimized the likelihood of sudden currency depreciation.
Economic slowdowns have also been lessened through the diversification of trading partners and the liberalization of trade regimes. With the implementation of these reforms, shocks in the economy of one trading partner are less concerning, given that there remain other partners with which to continue business.
One way to further examine the progress of foreign economies is to look at recovery rates. It is reported that during the 1970s and ’80s, after an economic downturn, the average developing economy spent more than a decade returning to their pre-downturn GDP per capita. This recovery time decreased dramatically to two years in the early 2000s.
Historical growth rates provide additional insight into the question of progress. During the 1970s and ’80s, the developing world was experiencing an economic slump more than one third of the time. By the start of the 21st century, this statistic changed dramatically, showing that 80 percent of the time, developing economies were expanding and growth had peaked at the most prosperous rate since 1950.
While some emerging economies have shown a certain level of immunity to changes in outside economies, they have not become absolutely shielded from the impacts. Significant shocks in major economies like the U.S. will still affect other nations, but certain parts of the developing world have been fortified enough to sustain the effects of dips or slows in other more prominent economies.
Lower volatility has also been shown in developing countries, which is positive for the entire world. Volatility allows for shaky economic situations and creates a lack of certainty around investments. Any current decrease in volatility will allow a country to sustain long-term growth. Given the intertwined nature of world economies, this is good news not only for these foreign economies but also for the U.S.
Given the research and the current state of emerging economies, it is clear that these countries are not only sustaining the effects of shifts in major economies, but they are simply doing better than they were in the past. If developing countries are able to continue fortifying their economies, they may find that the old adage of the U.S. sneezing and others catching its cold may not hold true for long.
– Amy Russo
Sources: Bloomberg Business, SSRN
Photo: Beyond Brics