The outbreak of COVID-19 and the wide-ranging measures needed to slow its advance triggered an unprecedented collapse in oil demand, a surge in oil inventories, and a record one-month decline in oil prices in March 2020. This paper examines the likely implications of the 2020 oil price plunge for emerging market and developing economies. It presents four main results. First, the record plunge in oil prices was predominantly driven by demand factors as wide-ranging measures to stem the pandemic precipitated an unprecedented collapse in oil demand, but the surge in oil inventories also exerted downward pressure on oil prices. Second, this latest oil price decline was preceded by six previous plunges over the past half-century, during which energy exporters and importers suffered similar initial output losses (about 0.5 percent) that were unwound within three years. Third, the current episode of low oil prices holds limited promise to boost the global economy amid widespread restrictions and narrow room for fiscal support in energy-exporting emerging market and developing economies. Fourth, many emerging market and developing economies entered the current public health crisis with precarious fiscal positions; current low oil prices are thus an opportunity to review energy-pricing policies, including remaining energy subsidies, to mobilize domestic resources.
Unprecedented monetary policy accommodation in advanced economies and a large, coordinated fiscal stimulus by G20 countries helped to support a solid rebound in global output right after the 2009 Global Recession. However, global growth subsequently slowed to a sluggish pace by pre-recession standards, and many emerging market and developing economies (EMDEs) have been struggling to unwind their fiscal stimulus and contain a buildup of debt. The experience of the global recession in 2009 highlights the need for well-timed, appropriately calibrated domestic stabilization policies, but also the benefits of international cooperation and coordination in support of strong and sustained global growth and financial system stability. Sound policy frameworks can help create room for stabilization policies, such as fiscal rules to safeguard fiscal sustainability or macroprudential policies and capital flow management measures to better manage systemic risks.
Emerging markets and developing economies (EMDEs) weathered the 2009 global recession relatively well. However, the impact of the global recession varied across economies. EMDEs with stronger pre-crisis fundamentals -- such as large foreign exchange reserves, sound fiscal positions, and low inflation -- suffered milder growth slowdowns, in part due to their greater capacity to engage in monetary and fiscal stimulus. Low-income countries were also resilient, as foreign aid and inflows of remittances remained relatively stable. In contrast, EMDEs that were heavily dependent on short-term capital flows -- such as portfolio investment and cross -- border bank lending—fared less well, especially those in Europe and Central Asia. A key lesson for EMDEs is the need to strengthen macroeconomic frameworks and create policy space to prepare for future global downturns.
This paper examines the determinants of corporate savings in a cross-country panel setting. Specifically, it employs firm-level data covering more than 540,000 firm-year observations for 12 advanced and emerging market economies. Panel regression results suggest that reductions in statutory corporate income tax rates can explain one-third of the rise in corporate savings (defined as net financial assets) in 2003-17. This finding is supported by a propensity scores matching analysis of the effects of changes in corporate income tax rates.
Fiscal vulnerabilities depend on both the level and composition of government debt. This study examines the role of debt thresholds and debt composition in driving the non-linear behavior of long-term interest rates through a novel approach, a panel smooth transition regression with a general logistic model. The main findings are threefold. First, the impact of the expected public debt level on interest rates rises exponentially when the share of foreign private holdings exceeds approximately 20 percent of government debt denominated in local currency. Second, when the share of foreign private investors is 30 percent, an increase in the share of foreign private holdings of government debt could raise long-term interest rates once the public debt-to-GDP ratio exceeds 60 percent of GDP, offsetting the downward pressure on long-term interest rates from higher market liquidity. Third, out-of-sample forecasts of this novel non-linear model are more accurate than those of previous methods.
The paper uses Google mobility data to identify the determinants of social distancing during the 2020 COVID-19 outbreak. The findings for the United States indicate that much of the decrease in mobility is voluntary, driven by the number of COVID-19 cases and proxying for greater awareness of risk. Non-pharmaceutical interventions such as closing nonessential businesses, sheltering in place, and school closings are also effective, although with a total contribution dwarfed by the voluntary actions. This suggests that much social distancing will happen regardless of the presence of non-pharmaceutical interventions and that restrictions may often function more like a coordinating device among increasingly predisposed individuals than repressive measures per se. These results are consistent across country income groups, with only the poorest countries showing limited effect of non-pharmaceutical interventions and no voluntary component, consistent with resistance to abandon sources of livelihood. The paper also confirms the direct impact of the voluntary component on economic activity, by showing that the majority of the fall in restaurant reservations in the United States and movie spending in Sweden occurred before the imposition of any non-pharmaceutical interventions. Widespread voluntary de-mobilization implies that releasing constraints may not yield a V-shaped recovery if the reduction in COVID risk is not credible.
Price Controls: Good Intentions, Bad Outcomes (April 2020)
The use of price controls is widespread across emerging markets and developing economies, including for food and key imported and exported commodities. Although they are sometimes used as a tool for social policy, price controls can dampen investment and growth, worsen poverty outcomes, cause countries to incur heavy fiscal burdens, and complicate the effective conduct of monetary policy. Replacing price controls with expanded and better-targeted social safety nets, coupled with reforms to encourage competition and a sound regulatory environment, can be pro-poor and pro-growth. Such reforms need to be carefully communicated and sequenced to ensure political and social acceptance. Where they exist, price control regimes should be transparent and supported by well-capitalized stabilization funds or national hedging strategies to ensure fiscal sustainability.
Prospects, Risks, and Vulnerabilities in Emerging and Developing Economies: Lessons from the Past Decade (March 2020)
Growth in emerging markets and developing economies (EMDEs) has generally disappointed since the 2009 global recession, with sizable forecast downgrades in most years. EMDEs continue to face downside risks to growth outlook over the next couple of years. These include heightened global policy uncertainty, trade tensions, spillovers from weaker-than-expected growth in major economies, and disorderly financial market developments. These risks are accompanied by region-specific risks, including geopolitical tensions, armed conflict, and severe weather events. If risks materialize, their impact on EMDEs depends on the magnitude of spillovers and domestic vulnerabilities. Since the 2009 global recession, external, corporate sector and sovereign vulnerabilities have risen in most EMDEs, leaving them less well-prepared for future shocks. Low-income countries, in particular, face elevated vulnerabilities, with about 40 percent of them currently in debt distress. Over the longer run, EMDEs also face weakening potential growth, reflecting decelerations in capital accumulation and productivity growth, as well as demographic headwinds. These constraints are likely to hamper growth in the next decade unless they are mitigated by ambitious and credible reform agendas.
The 2009 global recession demonstrated, once again, the importance of crisis prevention as well as the critical need for preserving policy room so that emerging market and developing economies (EMDEs) can act when their economies are hit by shocks. And now, with the global growth outlook still weak and vulnerabilities rising, these lessons underscore the need for comprehensive policies to improve EMDEs' resilience to shocks and lift long-term growth prospects. On the macroeconomic front, priorities include shoring up fiscal positions, keeping adequate foreign reserves, and strengthening policy frameworks. Financial sector policies to adapt to a changing global financial environment include strengthening home-host supervisor coordination and establishing prudential authorities with the appropriate tools and mandates to mitigate systemic risks. Structural policy priorities include investment in human capital and infrastructure to offset the decline in potential growth that is expected to continue over the next decade. Renewed reform momentum is needed to create the environment that generates private sector-led, productivity-driven growth supported by measures to improve governance and business climates.
Can This Time Be Different? Policy Options in Times of Rising Debt (March 2020)
Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years. Since 2010, emerging and developing economies have experienced another wave of historically large and rapid debt accumulation. Similar past debt buildups have often ended in widespread financial crises in these economies. This paper examines the factors that are likely to determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. It reports two main results. First, the rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. Second, policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. The post-crisis debt buildup has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt-related transactions are transparently reported.
Subdued Potential Growth: Sources and Remedies (March 2020)
Global potential output growth has been flagging. At 2.5 percent in 2013-17, post-crisis potential growth is 0.5 percentage point below its longer-term average and 0.9 percentage point below its average a decade ago. Compared with a decade ago, potential growth has declined 0.8 percentage point in advanced economies and 1.1 percentage point in emerging market and developing economies. The slowdown mainly reflected weaker capital accumulation but is also evidence of decelerating productivity growth and demographic trends that dampen labor supply growth. Unless countered, these forces are expected to continue and to depress global potential growth further by 0.2 percentage point over the next decade. A menu of policy options is available to help reverse this trend, including comprehensive policy initiatives to lift physical and human capital and to encourage labor force participation by women and older workers.
Global Recessions (March 2020)
The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global gross domestic product contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies, as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.
Benefits and Costs of Debt: The Dose Makes the Poison (February 2020)
Government debt has risen substantially in emerging market and developing economies (EMDEs) since the global financial crisis. The current environment of low global interest rates and weak growth may appear to mitigate concerns about elevated debt levels. Considering currently subdued investment, additional government borrowing might also appear to be an attractive option for financing growth-enhancing initiatives such as investment in human and physical capital. However, history suggests caution. Despite low interest rates, debt was on a rising trajectory in half of EMDEs in 2018. In addition, the cost of rolling over debt can increase sharply during periods of financial stress and result in financial crises; elevated debt levels can limit the ability of governments to provide fiscal stimulus during downturns; and high debt can weigh on investment and long-term growth. Hence, EMDEs need to strike a careful balance between taking advantage of low interest rates and avoiding the potentially adverse consequences of excessive debt accumulation.
Although emerging market and developing economies (EMDEs) weathered the global recession a decade ago relatively well, they now appear less well placed to cope with the substantial downside risks facing the global economy. In many EMDEs, the room for monetary and fiscal policies to respond to shocks has eroded; underlying growth potential has slowed; and the momentum for improving policy frameworks, institutions, and business climates seems to have slackened. The experience of the 2009 global recession highlights once again the critical role of policy room in shielding economic activity during adverse shocks. The subsequent decade of anemic growth underlines the need for sound policy frameworks, institutions, and business environments to promote sustained growth. With the global growth outlook weakening and vulnerabilities rising, the policy priority for EMDEs is now to improve resilience to shocks and to lift long-term growth prospects.
This paper presents a review of studies that estimate the cost of achieving the Sustainable Development Goals. Although the Sustainable Development Goals provide useful benchmarks for fiscal authorities and donors, typical cross-country costing exercises can be misleading, for a variety of reasons: double counting, sensitivity to underlying assumptions, downplaying the critical role of policy and institutions in advancing toward the goals, failure to discount costs or consider operation and maintenance costs in a consistent manner, and overlooking the tendency for different types of Sustainable Development Goal—related spending to have distinct effects. Recent costing studies by the World Bank Group have been developed to minimize the drawbacks of earlier studies. The paper also briefly reviews how the World Bank Group engages with stakeholders on the Sustainable Development Goals agenda.
Inflation and Public Debt Reversals in Advanced Economies (January 2020)
This paper quantitatively assesses the effects of inflation shocks on the public debt-to-GDP ratio in 19 advanced economies using simulation and estimation approaches. The simulations based on the debt dynamics equation and estimations of impulse responses by local projections both suggest that a 1 percentage point shock to the inflation rate reduces the debt-to-GDP ratio by about 0.5 to 1 percentage points. The results also suggest that the impact is larger and more persistent when the debt maturity is longer, but the difference from the benchmark case is not significant. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce the public debt burden only marginally in many advanced economies.
The Role of Income and Substitution in Commodity Demand (January 2020)
This paper presents estimates of time-varying income elasticities of demand for energy and metal commodities. The analysis finds that the elasticities are close to unity, evaluated at world median per capita income levels. Furthermore, the estimates confirm that as income rises, demand growth for industrial commodities slows and eventually plateaus. Indeed, estimates for aggregate metals and energy differ by an order of magnitude throughout the income spectrum: from a low of 0.2 for advanced economies to nearly 2 for low-income countries. The analysis, which accounts for substitutability by estimating group aggregates as well as individual commodities with cross-price effects, is based on a panel autoregressive distributed lag model covering 1965–2018, for up to 63 countries.
Debt and Financial Crises (January 2020)
Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises — after 8 years output per capita was typically 6–10 percent lower and investment 15–22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service cover, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
This paper addresses the identification of low-frequency macroeconomic shocks, such as technology, in Structural Vector Autoregressions. Whilst identification issues with long-run restricted VARs are well documented, the recent attempt to overcome said issues using the Max-Share approach of Francis et al. (2014) and Barsky and Sims (2011) has its own shortcomings, primarily that they are vulnerable to bias from confounding non-technology shocks. A modification to the Max-Share approach and two further spectral methods are proposed to improve empirical identification. Performance directly hinges on whether these confounding shocks are of high or low frequency. Applied to US and emerging market data, spectral identifications are most robust across specifications, and non-technology shocks appear to be biasing traditional methods of identifying technology shocks. These findings also extend to the SVAR identification of dominant business-cycle shocks, which are shown will be a variance-weighted combination of shocks rather than a single structural driver.
There are currently 31 countries classified as low income, less than half the number in 2001. Rapid growth in low-income countries from 2001 to 2018 allowed many to progress to middle-income status, supported by the commodity price boom of 2001-11, debt relief under the Heavily Indebted Poor Country Initiative and Multilateral Debt Relief Initiative, increased investment in human and physical capital, improved economic policy frameworks, and recoveries from the deep recessions in transition economies during the 1990s. However, the prospects for current low-income countries appear much more challenging. Compared to the low-income countries in 2001 that became middle-income countries, today's low-income countries are further below the middle-income country threshold and more often fragile; their heavy reliance on agriculture makes them vulnerable to climate change and extreme weather events; and their scope to boost external trade is limited by geography. Coordinated and multi-pronged policy efforts are required to address these challenges.
Using firm-level survey data for a large cross section of countries, the paper assesses the gap in labor productivity between formal and informal firms in developing countries for which comparable data are available. It also investigates the impact of competition from informal firms on the labor productivity of formal firms. The results show that on average, the labor productivity of informal firms is about one-fourth that of formal firms. Moreover, the labor productivity of formal firms that face competition from informal firms is about 75 percent of the average labor productivity of formal firms that do not experience informal competition. This suggests that competition from the informal sector can erode formal firms' market share and the resources available to boost productivity where formal firms shoulder the additional cost of regulatory compliance. These findings are robust to a range of firm and country characteristics as well as checks for endogeneity concerns.
Inflation in Low-Income Countries (July 2019)
This paper studies the effects of global and domestic inflation shocks on core price inflation in 105 countries between 1970 and 2016, by using a heterogeneous panel vector-autoregressive model. The methodology allows accounting for differences across groups of countries (advanced economies, emerging markets and developing economies, and low-income countries) and across groups with different country characteristics (such as foreign exchange and monetary policy regimes). The empirical results indicate that most of the variation in inflation among low-income countries over the past decades is accounted for by external shocks. More than half of the variation in core inflation rates among low-income countries is due to global core price shocks, compared with one-eighth in advanced economies. Global food and energy price shocks account for another 13 percent of core inflation variation in low-income countries -- half more than in advanced economies and one-fifth more than in emerging markets and developing economies. This points to challenges in anchoring domestic inflation expectations, which have been most evident among low -- income countries with floating exchange rates, especially in cases where central bank independence has been weak.
Debt vulnerabilities in low-income countries have increased substantially in recent years. Since 2013, median government debt has risen by about 20 percentage points of gross domestic product and increasingly comes from non-concessional and private sources. As a result, in most low-income countries, interest payments are absorbing an increasing proportion of government revenues. The majority of low-income countries would be hard hit by a sudden weakening in trade or global financial conditions given high levels of external debt, lack of fiscal space, low foreign currency reserves, and undiversified exports. A proactive effort to identify and reduce debt-related vulnerabilities is a priority for many low-income countries. Policy makers should focus on mobilizing domestic resources, improving debt transparency, and strengthening debt management practices. These efforts should be complemented by measures to strengthen fiscal frameworks, improve the efficiency of public expenditures and public investment management, and develop domestic financial systems.
Inflation Expectations: Review and Evidence (March 2019)
This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.
The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors' concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.
Inflation and Exchange Rate Pass-Through (March 2019)
The degree to which domestic prices adjust to exchange rate movements is key to understanding inflation dynamics, and hence to guiding monetary policy. However, the exchange rate pass-through to inflation varies considerably across countries and over time. By estimating structural factor-augmented vector-autoregressive models for 47 countries, this paper brings to light two fundamental factors accounting for these variations: the nature of the shock triggering currency movements and country-specific characteristics. The empirical results in this paper are three-fold. First, an empirical investigation demonstrates that different domestic and global shocks can be associated with widely different pass-through ratios. Second, country characteristics matter, including policy frameworks that govern monetary policy responses, as well as other structural features that affect an economy's sensitivity to currency fluctuations. Pass-through ratios tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets. Finally, the empirical results suggest that central bank independence can greatly facilitate the task of stabilizing inflation following large currency movements and allows fuller use of the exchange rate as a buffer against external shocks.
Global Inflation Synchronization (March 2019)
The paper studies the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. The authors' methodology allows them to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. The paper reports three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods.
Understanding Inflation in Emerging and Developing Economies (February 2019)
Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of a recent book, "Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies," that analyzes this remarkable achievement. The findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
Inflation: Concepts, Evolution, and Correlates (February 2019)
In the past four to five decades, inflation has fallen around the world, with median annual global consumer price inflation down from a peak of 16.6 percent in 1974 to 2.6 percent in 2017. This decline began in advanced economies in the mid-1980s and in emerging market and developing economies in the mid-1990s. By 2000, global inflation had stabilized at historically low levels. Lower inflation has been accompanied by reduced inflation volatility, especially in advanced economies. This improvement in inflation outcomes has stemmed in large part from structural economic changes, including improved monetary and fiscal policy frameworks as well as international trade and financial liberalization. Lower and more stable inflation has often been associated with better growth and development outcomes, partly by reducing uncertainty, fostering a more efficient allocation of resources, and helping preserve financial stability.
Last Updated: Jul 14, 2020