Counting Upon The Asian NIE's and Developing Economies

October 23, 2008

The severity of the global recession will hinge importantly on the resilience of Asian newly industrialized economies, emerging economies, and developing economies. The notion of a polarized world, with advanced economies in North America and Europe as well as Japan, Australia and New Zealand posting quarters of negative growth but other countries only downshifting into third gear from fourth, does not seem very convincing. Stock markets are being plundered everywhere. It’s hard to imagine the kind of brisk growth achieved by developing economies during the past decade without the robust demand from the advanced economies. The list keeps lengthening of economies in the lower tiers of development with economic or market problems related to the financial crisis: Iceland, the Ukraine, Belarus, Hungary, Argentina, Mexico, Brazil, Pakistan, and South Korea to name a few.

New growth forecasts by the IMF look suspicious. The percentage point decline in projected growth between 2007 and 2009 is remarkably similar for all advanced economies (2.1 percentage points) and the developing and emerging nations as a whole (1.9 ppts). Moreover, components of the latter group also show more or less similar percentage point declines in economic growth between 2007 and 2009: 1.9 ppts in Africa, 2.3 ppts in central and eastern Europe, 2.3 ppts in Asia (including 2.6 ppts in China and 2.4 ppts in India), 2.4 ppts in the Western Hemisphere, and 2.9 ppts in what once composed the Soviet Union. Not surprisingly, the 2.4 ppt drop for advanced Asian Nics (Singapore, S. Korea, Taiwan, and Hong Kong) fits the above pattern too. Since growth in all these places started from a high level, the decline of around two percentage points still leaves a respectable pace of growth in 2009 of 7.7% in Asia, 6.1% in Africa, 5.9% in the Middle East, 3.4% in East and Central Europe, and 3.2% in both Central/South America and the Asian Nic’s.

It seems doubtful that the percentage point projected drop in growth among different developing economy regions and of all those economies compared to advanced economies happens to be so similar by sheer coincidence. More likely, a systematic approach in framing the forecasts produced the convergence. A different set of forecasts would have been achieved by instead assuming the same percentage reduction of growth rather than the same percentage point decline. In the first instance, if growth in advanced economies slows from 3% to 1%, an economy expanding at 7% slows to 5%.  In the second instance, growth in the faster economy slows to 2.3%. These two methodologies represent extremes, and the likeliest outcome will be a slowdown with intensity somewhere between these examples.



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