Why the Developing World Won't Catch the U.S. Economy's Cold

Years of structural reforms have made developing economies more resilient and less vulnerable to external shocks. That's good news for the U.S., too.

A coffee in a co-op warehouse in Manizales, Colombia.

A coffee in a co-op warehouse in Manizales, Colombia.

Photographer: Paul Smith/Bloomberg

Last week the U.S. Commerce Department announced that first-quarter GDP growth for 2015 was an anemic 0.2 percent.  This immediately sparked fears that a U.S. slowdown could lead to a global recession. But the cliché about America sneezing and the rest of the world catching the cold doesn’t hold like it used to. The U.S. isn’t as contagious as it was, and developing countries in particular are far more robust to economic shocks. That’s good news for everyone. It means less volatility in Asia, Africa, and Latin America, which contributes to happier people, greater political stability, and stronger long-term growth—all of which should help lift the U.S. out of its own doldrums.

A team of IMF researchers has looked at the long-term record of the world’s economies when it comes to growth and recession. They measured how long economies expanded without interruption, as well as the depth and length of downturns. Over the past two decades, low and middle-income economies have spent more time in expansions, while downturns and recoveries have become shallower and shorter. This suggests countries have become more resilient to shocks.  

In the 1970s and '80s, the median developing economy took more than 10 years after a downturn to recover to the GDP per capita it had prior to that slump. By the early 2000s, that recovery time had dropped to two years. In the 1970s and '80s, countries of the developing world spent more than a third of their time in downturns, but by the 2000s they spent 80 percent of their time in expansions. The first decade of the 21st century was the first time that developing economies saw more expansion and shorter downturns than did advanced economies: Median growth in the developing world was at its highest since 1950 and volatility at its lowest.

Developing countries still face a larger risk of deeper recession when terms of trade turn against them, capital flows dry up, or advanced economies enter recessions themselves. But the scale of that risk has diminished.  That’s because low and middle-income economies have introduced policy reforms that increase resilience: flexible exchange rates, inflation targeting, and lower debt.  

Economies with inflation-targeting regimes see recovery periods less than a third as long as economies without targeting, for example. Larger reserves are associated with longer expansions. And median reserves in developing countries more than doubled as a percentage of GDP between the 1990s and 2010. Median external debt has dropped from 60 percent to 35 percent of GDP over that same period. Such policy changes account for two-thirds of the increased recession-resilience of developing countries since the turn of the century, suggest the IMF researchers—leaving external factors, such as positive terms of trade, accounting for just one-third.

That’s good news for the developing world—not least because volatile growth is particularly bad for poorer people, who are most at risk of falling into malnutrition or being forced to take children out of school, which has long-term consequences for future earnings. That might help explain the relationship between growth volatility, slower reductions in poverty, and rising inequality. Sudden negative income shocks can also be a factor in sparking violence: When rains fail, the risk of civil war in Africa spikes, and when coffee prices in Colombia fall, municipalities cultivating more coffee see increased drug-related conflict.  The African analysis suggests that a five percentage-point drop in income growth is associated with a 10 percent increase in the risk of civil conflict in the following year.

Finally, because volatility increases the uncertainty attached to investments, it can also be a drag on overall long-term economic performance. Viktoria Hnatkovska and Norman Loayza of the World Bank estimated that moving from a comparatively stable to a relatively volatile growth trajectory is associated with a drop in average annual growth of as much as 2 percent of GDP.   

Lower volatility in the developing world and its associated long-term growth performance is also good news for the U.S. A strong global economy is still a positive force for growth in every country, including developed nations. And with the developing world accounting for about one-third of trade and GDP at market rates, as well as three-fifths of U.S. exports, its role in supporting American economic performance has never been greater. Those hoping for a recovery in U.S. output should be grateful for stronger economic immune systems in the rest of the world.

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