HONG KONG – It is no secret that emerging economies are facing serious challenges, which have undermined their once-explosive growth and weakened their development prospects. Whether they return to the path of convergence with the advanced economies will largely depend on how they approach an increasingly complex economic environment.
Of course, these economies’ development path was never simple or smooth. But for most of the post-World War II period, until as recently as ten years ago, it was relatively clear-cut. Countries needed to open their economies at a sensible pace; leverage global technology and demand; specialize in tradable sectors; pursue a lot of investment (some 30% of GDP); and promote foreign direct investment, with appropriate provisions for knowledge transfer.
Throughout this process, the emerging economies recognized the importance of allowing market mechanisms to work, guaranteeing property rights, and safeguarding macroeconomic and financial stability. Perhaps most important, they knew that they had to focus on generating employment, particularly in urban areas and modernizing sectors, and on inclusiveness more broadly.
As they pursued this agenda, emerging economies experienced stuttering starts and numerous crises, often associated with excessive debt, currency traps, and high inflation. And, upon reaching middle-income levels, countries confronted the policy and structural pitfalls that accompany the transition to high-income status. Nonetheless, in an increasingly open global environment, characterized by strong growth (and demand) in the advanced economies, the emerging economies managed to make huge and rapid progress.