Overall, the global economy is moving into a new and hopefully less volatile phase. The extreme risks and swings in perceptions that have driven global capital and output markets have eased significantly, even as new risks and challenges have gained in prominence.
The majority of developing countries have navigated the crisis and immediate post-crisis period very well. With the exception of some countries in developing Europe and the Middle East & North Africa, they recovered relatively quickly from the crisis and have enjoyed solid, if less rapid than boom period, growth rates. With the demand gaps opened up by the crisis largely filled, future growth will increasingly be determined by the success with which countries succeed in addressing supply-side bottlenecks, including gaps in physical, social, and regulatory infrastructure:
In many countries, policy attention is appropriately returning to simplifying regulations, opening up to trade and foreign investment, investing in infrastructure and human capital. These are the policies that have underpinned the acceleration in developing country growth over the past 20 years, and it is only through continued reform and progress in these policies that the strong productivity growth of the past 20 years can be maintained.
For the many countries operating at close to or even above full capacity, macroeconomic policy may need to be tightened—both to reestablish fiscal space that was used up in response to the crisis and to prevent inflationary pressures and asset bubbles from building up.
The external risks facing developing countries have also evolved:
The recent decline in industrial commodity prices is, perhaps, signaling an end to the upward phase of the commodity cycle. Policy makers in commodity-exporting countries need to take a close look at the potential consequences of a sharper-than-anticipated decline in commodity prices for growth, government finances, and their external financing needs.
For countries in East Asia, the recent intensification of monetary easing in Japan could prompt strong and disruptive capital inflows, adding to already existing inflation and currency pressures.
Longer term, as high-income monetary policy becomes less accommodative, interest rates in developing countries will rise. Higher rates may generate difficult adjustments and possibly domestic crises, especially in countries where public and private sector indebtedness has been on the upswing.
Over the longer term, higher interest rates will translate into increased capital costs, potentially slowing developing-country growth by as much as 0.6 percentage points per annum after three years as firms reduce debt levels to more manageable levels.