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Developing countries pass stress-test of financial crisis with flying colors

Andrew Burns's picture

Developing countries are estimated to have grown by 7 percent in 2010, and growth is projected to come in at 6 and 6.1 percent in 2011 and 2012 (see Global Economic Prospects, January 2011) – more than twice as fast as high-income countries.  This return to very strong growth rates appears to confirm that the acceleration of growth that occurred during the late 1990s and into the early 2000s was indeed the result of improved fundamentals following years of structural reform, and not, as some had argued, an unsustainable reflection of very strong demand in high-income countries, or the temporary influence of very liquid financial conditions or high commodity prices.

Importantly, the strong recovery in developing countries occurred despite the relatively weak performance of high-income countries, and it was based on a successful reorientation of production and demand from foreign sources to domestic sources. As a result, developing-country imports grew faster than exports and developing-country demand was a major factor in spurring the lagging recovery in high-income countries.  Overall developing countries imports were about 7 percent higher than their pre-crisis trend, and developing country domestic demand was almost half of global growth in 2010.

This rebound in activity is not just a story of China or India, although these two economies continue to grow strongly. With the notable exception of developing Europe and Central Asia (the developing region that was most caught up in the excesses of the boom period and therefore has undergone the deepest post-crisis adjustment), virtually every developing region is growing at historically high rates.  Even Sub-Saharan Africa is growing rapidly. Excluding South Africa from the aggregate, the remaining, mainly low-income countries, in the sub-continent are projected to grow by just under 6.5 percent in each of 2011 and 2012.

Reflecting these developments, the vast majority of developing countries have regained or are close to regaining levels of activity consistent with full employment (see Figure 2 above).  While estimates suggest that output gaps (the percentage difference between current demand levels and the productive potential of an economy) in most of the high-income world and in developing Europe and Central Asia remain high (colored orange and red in the chart), most developing countries have (blue) or are close to having fully recovered (yellow).

If you think of the financial crisis as a stress-test of the earlier strong performance of developing countries (and, it is hard to imagine devising a more severe one), then developing countries came through with flying colors.


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