Slowdown in Emerging Markets: Not Just a Hiccup


By Evridiki Tsounta and Kalpana Kochhar 

(Versions in Español)

Emerging market economies have been experiencing strong growth, with annual growth for the period 2000-12 averaging 4¾ percent per year—a full percentage point higher than in the previous two decades. In the last two to three years, however, growth in most emerging markets has been cooling off, in some cases quite rapidly.

Is the recent slowdown just a hiccup or a sign of a more chronic condition? To answer this question, we first looked at the factors behind this strong growth performance.

Our new study finds that increases in employment and the accumulation of capital, such as buildings and machinery, continue to be the main drivers of growth in emerging markets. Together they explain 3 percentage points of annual GDP growth in 2000–12, while improvements in the efficiency of the inputs of production—which economists call “total factor productivity”—explain 1 ¾ percentage points (Figure 1).

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India’s Investment Slowdown: The High Cost of Economic Policy Uncertainty


By Rahul Anand and Volodymyr Tulin

India, after witnessing spectacular growth averaging above 9 percent over the past decade, has started to slow in the last few years. The slump in infrastructure and corporate investment has been the single biggest contributor to India’s recent growth slowdown.

India’s investment growth, averaging above 12 percent during the last decade fell to less than one percent in the last two years. What is especially worrisome is that more and more investment projects are getting delayed and shelved, while the pipeline of new projects has become exceptionally thin.

This slowdown has sparked an intense public debate about its causes. Some commentators, including representatives of the business community, argue that high interest rates, which raise financing costs, are the major culprit, dampening investment.  Others maintain that interest rates are only partly responsible for the current weak levels of investment, suggesting that a host of other factors, particularly on the supply side, are at play.

Our new Working Paper seeks to shed some light on the reasons behind this investment malaise. Using a novel index of economic policy uncertainty—an innovation in our analysis—we find that heightened uncertainty regarding the future course of broader economic policies and deteriorating business confidence have played a significant role in the recent investment slowdown. 

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Europe’s Choice: Risk Stagnation or Pursue Integration


Shafik 3By Nemat Shafik

Europe faces a stark choice: risk stagnation or pursue integration. It can continue to muddle through, and hope that growth in the world economy will eventually pick up enough steam to pull its economy out of the doldrums. Or it can make a decisive push to revitalize its economy and complete the reforms needed to achieve a fully integrated economic and monetary union

Five years into the crisis, recovery in the euro area remains fragile. Important actions at both the national and euro-wide levels have tackled the immediate threats to the single currency. These include the European Central Bank’s announcement in 2012 that it stands ready to undertake outright monetary transactions in secondary sovereign bond markets, the completion of the European Stability Mechanism, which created a financial firewall around the euro area, and efforts to restore the health of public finances and implement structural reforms.

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India’s Economy: Stamina Is The Name Of The Game


by Laura Papi and Rahul Anand*

So far 2013 has been a breath of fresh air in terms of economic news: financial markets have rallied and economic indicators have started to surprise on the upside. In India, the rupee has strengthened and the Bombay Stock Exchange index (Sensex) crossed the 20,000 mark for the first time in two years.  Industrial production has started picking up.

So is India’s growth about to go back to 8-9 percent? The short answer is no. But we need to look back to understand why India’s growth has decelerated to a decade low and why the slump, which has hit investment particularly hard, has persisted for over a year. As structural problems are at the root of the slowdown, so structural reforms must be at the core of the solution.

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For Your Eyes Only: Three Jobs Not to Defer in 2013


David LiptonBy David Lipton

(Versions in  عربي, 中文, EspañolFrançaisРусский, 日本語)

With the New Year, we all hope to put the global financial crisis behind us. We also need to do more to secure our future.

Beyond our current economic and financial problems, there are long-term issues that we all know about, but that get too little attention in an era when policymakers are so fully engaged in slogging away at more immediate problems. Unfortunately, long-term issues unaddressed today will become crises tomorrow.

So we had better lengthen our focus, see what looms on the horizon, and do more to steer the global economy in a better direction.

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World Faces Weak Economic Recovery


By Olivier Blanchard

(Versions in  عربي中文EspañolFrançaisРусский日本語)

The global recovery continues, but the recovery is weak; indeed a bit weaker than we forecast in April.

In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries.  In the United States, growth is positive, but too low to make a serious dent to unemployment.

Growth has also slowed in major emerging economies, from China to India and Brazil.

Downside risks, coming primarily from Europe, have increased.

Let me develop these themes in turn.

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Global Financial Stability: What’s Still To Be Done?


By José Viñals

(Versions in Español, عربي)

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Much has been done

In recent months, important and unprecedented policy steps have been taken to quell the crisis in the euro area. At the national level, stronger policies are being put in place in Italy and Spain; a new agreement has been reached on Greece; and Ireland and Portugal are making good progress in implementing their respective programs. Importantly, the European Central Bank’s decisive actions have supported bank liquidity and eased funding strains, while banks are reinforcing their capital positions under the guidance of the European Banking Authority. Finally, steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the “firewall” at the euro area level.

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