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Implications of slow growth in high-income countries for developing countries

Theo Janse van Rensburg's picture
In an earlier blog-post, I have argued that even as developing countries’ potential growth rates have disconnected from those of high-income countries (due to strengthened domestic policy frameworks), the cyclical component of their economies have become more synchronized (largely as a result of their participation in global trade almost doubling in the last 20 years).
This brings the question how slow growth in high-income countries will impact developing countries. Simulations conducted on the World Bank’s macroeconometric model indicates that for every 1 percentage point decline in high-income countries’ demand, developing country exports may fall by as much as 2.2 percent, while output may decline by about 0.8 percent. Output declines by less than exports for two major reasons, firstly, exports represented only an estimated 30% of developing country output in 2011 and, secondly, because imports also decline due to the re-export nature of much of their trade. 

Regions that have significant (largely non-commodities) trade with high-income countries, such as East Asia and the Pacific (EAP) and Sub-Saharan Africa (SSA), are likely to experience the steepest decline in export volumes, while the Middle East and North Africa (MENA) region will be least impacted. In regions where exports constitute a relatively large share of output and/or where the initial shock to exports is relatively large, the overall impact on GDP is most severe, and vice-versa. In the simulation, a 1 percent decline in high-income GDP is likely to reduce output in EAP by about 1¼ percentage points, not only due to the region’s inter-connectedness with global and high-income markets, but also as trade represents a large share of overall output. In contrast, output is likely to decline by only 0.32 percentage points in MENA, largely because of the region’s small export share in total output.1

1. The World Bank econometric model’s export elasticity estimates are largely consistent with results observed in economic literature. Indeed, estimates of developing country export sensitivities to changes in their trading partners’ income vary significantly by country. In an earlier study of some 75 countries, Senhadji and Montenegro (1999) found long run elasticities ranging between 0.17 in Ecuador to 4.34 in Korea. Milberg and Wilberg (2010), in a 16 country study of export sensitivity to US GDP changes, found elasticity estimates ranging between 0.77 (for Taiwan) and up to 8.65 for China. Razmi and Blaker (2008), in a study of 18 developing countries, obtain estimates ranging between 0.21 for Mauritius and 4.1 for China. These differences in results are largely a function of different countries in their respective samples, the differences in the commodity composition among countries (hence the differences in sensitivities to external shocks) and different methodologies underpinning the results. Nonetheless the results from the World Bank model are broadly consistent with the results that Asian economies, due to their greater vertical integration with global supply chains are likely to be more sensitive to changes in incomes of high-income countries than those from Sub Saharan Africa.

Comments

Submitted by Erick Valbrun on
This finding can be an opportunity for developing countries to keep growing. Based on the hypothesis that the economy of high income countries will improve in the next five years, two approaches can be adopted by developing countries to maintain growth and development. First, developing countries should change the supply chain exchange paradox with high income economy and enhance trade among developing countries. That will stimulate and insure trade development in developing countries from now to the coming century. Yet the cost may be a matter but the compensation and stabilization will come with the large size of the developing countries’ economy. Output will vary between 50 to 70 percent of export depending on the comparative advantage in the region. That will aim not only in the reinforcement of south –south cooperation but also in preserving the pace of growth in developing countries. Second, developing countries should be aware on the trend of the global economy. As the global economy will recover from the crisis, high economy will start growing again. Resources and commodities from developing countries will be highly demanding. Therefore, export from developing countries to high developed country will increase; more output from developing countries will be available for trade in the global economy. That will lead to the circle of permanent growth in developing countries. To consolidate this permanent growth into development, developing countries need to build social safety net, strengthen governance and smart innovative management and guarantee the well being for their people by promoting education, health and employment.

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