Ten years ago, the dominoes were falling fast.
By June 2009, the US recession was officially over. But the contagion had spread to emerging and developing economies: Turkey slipped into recession, followed by Chile, Hungary, Russia, and Vietnam. A global recession was underway, one that would be distinguished by the largest decline in GDP per capita since the end of World War II.
Yet the fallout for most emerging and developing economies was manageable. Three-fifths of them avoided a recession outright: their growth rate slowed – but did not turn negative. Low-income economies grew faster in 2009 than in the previous year and poverty rates continued to fall. The economic recovery, moreover, was stronger and swifter than it was in advanced economies: by 2010, GDP growth in emerging and developing economies had rebounded to 6.8 %, more than four times the rate in 2009. The usual order of things had been inverted: advanced economies caught a cold while most emerging and developing economies simply sneezed.
Those achievements underscore an important truth for policymakers: global recessions might be inevitable, but it’s certainly possible to moderate their impact on their economies. Preparation matters. In the run-up to the 2009 crisis, many emerging and developing economies demonstrated that they’d learned the lessons of earlier crises: they seized the opportunity offered by strong growth to build buffers. They accumulated sizable primary budget surpluses – in 2007, the average was 2.4% of GDP. They slashed government debt – to an average of 45% of GDP in 2007 from 76% in 2002. They boosted foreign exchange reserves. They tamed inflation and strengthened their financial institutions.
In doing so, they built up a formidable arsenal of policy buffers for use in a crisis. And when it came, they acted fast, forcefully, and in coordination with major advanced economies and international financial institutions. The result was unprecedented stimulus in the form of tax cuts, lower interest rates, and investment in infrastructure and social-protection programs.
Yet the evidence today suggests that developing economies are less prepared for another steep global downturn than they were a decade ago. First, they have been struggling with slower growth since 2010 – a challenge that has been accompanied by a rise in fiscal and current account deficits and a significant build-up in debt. That has curtailed policymakers’ options for the next downturn. Second, progress in reducing poverty has slowed markedly. The poverty rate declined just 0.6 percentage point a year between 2013 and 2015 – less than half the rate in the previous two years. We think a further decline occurred at least through 2018. Under the circumstances, a global downturn in the near term could harm the poor more deeply than it did in 2009.
Emerging and developing economies, as a result, need to work harder to prepare for the next steep downturn than they did for the last one. To start with, they must rebuild the policy buffers that served them so well in 2009. Reducing debt and deficits and strengthening financial institutions and governance will give them greater room to manoeuvre on fiscal and macroeconomic fronts. But that will not be sufficient: policymakers also need to find new ways to ramp up growth—this time, through a long-term strategy that emphasises growth-enhancing investments, reduces economic inefficiencies and distortions, and strengthens human capital.
At the World Bank Group, we learned important lessons from our own response to the 2009 recession – which was unprecedented in both financing volume and the number of countries we supported. In just two years, we doubled our financing commitments and extended loans to more than 100 countries. Since then, we have made our own preparations for a future crisis. We have completed two global campaigns to boost our capital adequacy. We have improved our monitoring of global economic developments so risks can be identified more effectively. We have reformed our internal practices so our strategy is closely coordinated across the Bank Group.
Today, the long-term growth potential in emerging market and developing countries is lower than it was before the last global recession. But it is possible to boost potential growth. Our research shows that investments in human capital – such as healthcare improvements that boost life spans or increase high-school and college completion rates – can considerably boost potential growth in emerging market and developing economies. Similarly, increasing the participation of women in the labour force can boost labour-supply growth, which in turn improves an economy’s growth potential, as shown in our recently published study, A Decade After the Global Recession.
In short, emerging and developing economies can ramp up growth by adopting ambitious and credible reform agendas. This means an emphasis on productivity-enhancing investments, a strong focus on better educational outcomes and on-the-job training, and a commitment to expand female participation in the work force. It also means adopting reforms that strengthen the quality of institutions and improve the ease of doing business.
But the window of opportunity is narrowing. Policymakers must act quickly if they are to repeat the accomplishments of a decade ago in case of another global downturn.