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In still other countries, growth in the post-crisis period has been weaker than during the boom because of underlying supply-side constraints

Growth in Brazil, India, Russia, and South Africa has been 2–3½ percentage points slower since 2010 than it was during the pre-crisis boom period of 2003–07 (table 3). While different factors are at play in each of these middle-income countries, there are several common factors. First, growth during the boom period was much stronger than during the preceding four years or even 10 years. Many began to think that these higher pre-crisis growth rates might be consistent with potential output growth, a view that the strong bounce-back of growth in the period immediately following the crisis seemed to confirm.FN5 However, countries have had difficulty sustaining such rapid growth without generating goods or asset price pressures. This, plus increasing current account deficits, suggest that underlying potential output growth was slower than pre-crisis growth rates might have suggested. Indeed, World Bank estimates of potential output indicate that, in each of these countries, pre-crisis growth was well in excess of potential growth. Weak post-crisis growth in several of these countries has not generated significant spare capacity. Rather it has eliminated what were in some cases large positive output gaps in 2007.

Table 3
Growth post-crisis has been much weaker than during the pre-crisis period in several middle-income countries
Table 3
1. Average annual compound growth rate
2. Calendar year average of fiscal year GDP measured at factor cost for India
Source: World Bank, Datastream

To the extent that current output gaps are relatively small (or positive), efforts to increase growth through monetary and fiscal stimulus risk being (or may have been) ineffective and might add to debt or inflationary pressures without any sustained progress in increasing output or reducing unemployment.

According to the World Bank estimates in table 3, the 2012 output gap in Brazil, India, and Turkey is either positive or close to zero (less than 1 percent), suggesting limited scope for growth to accelerate in the short run (growth in 2012 was slower than potential growth in most of these countries). Moreover, growth rates in the future are likely to be constrained by the rate of growth of potential, which although higher than post-crisis averages for these countries, remains well below pre-crisis growth rates.

Of course, there is considerable uncertainty surrounding these (or any) estimates of potential output.FN6 However, inflation increased over the past year in two of the five countries in table 3, and current account balances deteriorated in all but one. These developments suggest that supply constrains rather than deficient demand nay be at the root of the slower growth during recent years (table 4).

Table 4
Inflation is rising or current account deteriorating in countries with tight output gaps
Table 4
Source: World Bank

For all of these countries, if growth is to return to pre-crisis growth rates on a sustainable basis, much more attention will need to be paid to policies that tackle supply-side bottle necks, whether they stem from weak or poorly enforced regulations, corruption, inadequate or irregular provision of electricity, or inadequate investments to improve educational and health outcomes.

5. The measures of potential used here are based on a production function method and rely on estimates of trend total factor productivity growth as well as assumptions that the full capacity rate of employment (employment divided by working-age population) are constant over time and that all of the services of the capital stock are available—where the capital stock is estimated as equal to the sum of all past investments depreciated at a 7 percent rate.

6. For instance, the South African Reserve Bank’s latest estimate of annual long-run potential output growth is 3.5 percent. However the bank also notes that “our estimates for South Africa over the same period as the ECB study reflect a decline from an average of 3.9 per cent (2000–07) to 2.8 per cent (2008–10); more or less similar to the estimated magnitude of decline in the euro area and the United States” (Ehlers and others 2013, 10).




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