Emerging markets must build on their recent success

It used to be that when advanced economies sneezed, emerging markets caught a cold. That is no longer true. Following recent global shocks, such as the post-pandemic inflation surge and a new wave of tariffs, emerging markets have held up well. Inflation has continued to slow, currencies have generally retained their value and debt issuance costs have remained at manageable levels. There has been no sign of the kind of financial turbulence that came with past economic shocks.

In fact, emerging markets have expanded their role as a key global growth engine, with their share of the world economy more than doubling since 2000. The 10 emerging markets in the G20 alone now account for over half of global growth.

While supportive external conditions have played a part in emerging markets’ impressive resilience, so have the policies and institutions underpinning it. Central banks have grown more independent, with clearer inflation targets and less reliance on foreign exchange interventions to absorb shocks. And more emerging markets are using fiscal rules to impose budgetary discipline.

In Brazil, for example, monetary reforms paid off in the country’s fight against inflation. Guided by an inflation-targeting framework established in 1999, Brazil was one of the first countries to raise interest rates as prices surged during the pandemic. It has since refined its framework and is now expected to reach its 3 percent target next year.

Likewise, Nigeria has implemented tough reforms to improve its energy pricing framework and phase out central bank financing of budget deficits. And Egypt is pushing ahead with plans to broaden its tax base, including by widening its value-added tax, closing loopholes and digitizing tax administration.

In a world that is likely to remain turbulent for some time, emerging markets need to press ahead with focused reforms

Mohammed Al-Jadaan & Kristalina Georgieva

But while emerging markets have made great strides in improving their policy frameworks and enhancing credibility, this is no time for complacency. Their strong recent performance also reflects favorable circumstances such as lower interest rates, accommodative financial conditions and robust commodity prices.

Moreover, emerging markets’ resilience has not yet translated into faster growth. Nearly six years after the COVID-19 outbreak, gross domestic product in emerging markets and developing economies is on a slower growth path than before the pandemic — a trend that has set back the goal of closing the income gap with advanced economies. At the same time, profound shifts in geopolitics, trade, technology and demographics could make it even harder for emerging markets to catch up.

In a world that is likely to remain turbulent for some time, emerging markets need to press ahead with focused reforms. Each country must strike a balance between growth-promoting policies and maintaining economic resilience (through reserves and other instruments that offer shelter in downturns).

Creating the conditions for a new job-rich growth surge requires strengthening the business environment to mobilize domestic investors and attract foreign capital. Stronger institutions and governance will lead to deeper financial markets in which the most dynamic and promising companies can grow. Policymakers must also position their economies to take advantage of the potential productivity gains from artificial intelligence. India, Saudi Arabia and other members of the Gulf Cooperation Council, for example, have unveiled impressive infrastructure investments that will lay the foundation for AI adoption for decades to come. Where possible, other emerging markets should follow their lead.

Some frontier markets also have the advantage afforded by a young and fast-growing working-age population that is hungry for opportunities. This demographic asset can yield an enormous dividend, but only if countries make substantial investments in education and training to prepare their workforce for the challenges ahead.

Increasingly, these economies are coming together to discuss how they can build on their hard-won resilience

Mohammed Al-Jadaan & Kristalina Georgieva

Although strains in old alliances have introduced additional uncertainty, the shifting geopolitical and trade landscape does present opportunities for new forms of integration and cooperation. Emerging markets are already playing a leading role in this shift. From Southeast Asia to Africa and Latin America, regional groupings are forging new trade connections and deepening their members’ economic and financial ties.

As emerging markets’ economic clout has increased, so has their influence in global debates. Increasingly, these economies are coming together to discuss how they can leverage their growing scale and build on their hard-won resilience.

Their growing prominence was top of mind at this week’s AlUla Conference for Emerging Market Economies, held in AlUla, Saudi Arabia. Jointly organized by Saudi Arabia and the International Monetary Fund, this annual event brings together policymakers, business leaders and economic thinkers to chart a course for these economies. Emerging market leaders mapped out plans to thrive in a world of shifting partnerships by emphasizing continued openness and collaboration. Their common goal is to face global volatility with sound economic policies that strengthen resilience and help their people become more prosperous and secure.

• Mohammed Al-Jadaan is Minister of Finance of Saudi Arabia.

• Kristalina Georgieva is Managing Director of the International Monetary Fund.

Copyright: Project Syndicate