Growth in emerging markets will have to be supported by a new wave of structural reforms, as the global environment turns less supportive and productivity gains of the last decade fade, a new study by the International Monetary Fund (IMF) showed on Thursday.
"Despite the changing external environment, sustained growth in these countries is still possible. But emerging markets need to maintain sound domestic policies, place renewed emphasis on structural reforms, and strive to increase productivity," according to the report titled "Emerging markets in transition: Growth prospects and Challenges".
As a raft of favorable external and internal conditions were waning, 80 percent of emerging markets decelerated in 2012, and their growth by the end of 2013 was, on average, 1.5 percentage points lower than in 2010-2011.
The slowdown reflected weaker external demand, particularly from advanced economies and China, and the rolling back of fiscal stimulus that was put in place in response to the global financial crisis.
"Advanced economies are not expected to return to the debt-fueled, pre-crisis growth rates. As advanced economies exit from unconventional monetary policies at different speeds, emerging markets are likely to see more volatility and higher borrowing costs. Commodity prices are not expected to be as buoyant going forward, which may dampen investment in commodity-exporting countries," the report said.
Facing these constraints, IMF said emerging market growth engines will need to implement structural reforms to reorient growth away from consumption in Brazil and Turkey, and away from investment in China.
Strengthening resilience to external shocks will require addressing increasing domestic vulnerabilities and containing the buildup of private sector excesses.
For lower-income countries, reforms that help develop new sectors and facilitate a move up the value chain would have larger gains. For higher-income countries, investing in research and development, higher education, and technological development would be priorities.
Managing the transition will pose a considerable challenge, the report noted. Structural reforms are costly, not always popular, and often opposed by strong vested interests.
Policymakers need to develop and clearly communicate their longer-term strategies to the public to garner the needed support for fundamental change, while making sure that the gains from growth are more evenly shared. It requires protecting the more vulnerable groups from the transition costs of these reforms, according to the report.