I found this very interesting IMF post on emerging markets that was released last week, which I thought was worth sharing.
I picked a chart from the post because it was the most interesting element tome me. The chart essentially shows the impact of external and internal factors on the growth of emerging economies.
In other words, it answers the question that investors are always arguing about: “What drives emerging market growth?”
Usually, there are two camps on this: Those who believe that growth in emerging markets has been driven by external factors, such as the amply supply of global credit and low interest rates, and those who argue internal factors play a starring role in growth, such as structural reforms and government policies.
So what is the bigger influencer then? The IMF blog post argues that “the truth lies somewhere in between”.
Research carried out by the international financial institution suggests that, on average, external factors explain 50% or more of the deviation of growth in emerging markets over 15 years (of course, there are caveats: there are notable exceptions over time and across countries).
Ok, so all that stuff isn’t earth-shatteringly new, but the chart below does provide a great glimpse on how much external and internal factors affect an economy at a given point in time.
At the height of the financial crisis, the drop in growth was almost fully accounted for by external factors for most countries.
However, “internal factors dominated in the strong growth uptake in emerging markets in 2006-07. The slowdown in growth since 2012 is also largely attributable to internal factors,” says the IMF.
As mentioned earlier, the caveat is that “for some large or relatively less open economies, such as China and India, internal factors—more than the external environment—mostly explain the fluctuations in growth from the average level over 1998-2013,” the IMF study pointed out.