A quarter century of growth now slipping: World Bank review of Developing Economies and Low-Income Countries

 

Emerging Markets and Developing Economies (EMDEs) and many Low-Income Economies have been transformed in the last quarter century, according to the World Bank, however, as the second quarter begins, headwinds have increased.

Challenges faced include protectionist measures and geopolitical fragmentation, high debt burdens, demographic shifts, and the rising costs of climate change which all weigh on economic prospects.

Growth was marked in the 25 years past. EMDEs economies now account for about 45 percent of global GDP, up from 25 percent in 2000, a trend driven by collective growth in the three largest EMDEs—China, India, and Brazil (the EM3).

Collectively, the World bank outlines, EMDEs have contributed about 60 percent of annual global growth since 2000, on average, double the share during the 1990s.

Today, nearly half of goods exports from EMDEs go to other EMDEs, compared to one-quarter in 2000. As cross border linkages have strengthened, business cycles among EMDEs and between EMDEs and advanced economies have become more synchronized, and a distinct EMDE business cycle has emerged.

Cross-border business cycle spillovers from the EM3 to other EMDEs are sizable, at about half of the magnitude of spillovers from the largest advanced economies (the United States, the euro area, and Japan).

Yet EMDEs confront a host of headwinds at the turn of the second quarter of the century. Progress implementing structural reforms in many of these economies has stalled.

As the second quarter opens, the World Bank states that a successful policy approach to accelerate growth and development should focus on boosting investment and productivity, navigating a difficult external environment, and enhancing macroeconomic stability.

In its review of low income countries over the quarter century, the World Bank states that rapid growth underpinned by domestic reforms and a benign global environment allowed many low-income countries (LICs) to attain middle income status in the first decade of the twenty first century.

However, since then, the rate at which LICs are graduating to middle-income status has slowed markedly. The prospects for today’s LICs appear much more challenging.

In recent years, per capita growth has been anemic amid heightened levels of conflict and fragility and adverse global developments. Across a wide array of development metrics, today’s LICs are behind where LICs that since turned middle-income stood in 2000.

Graduation

They are also more susceptible to domestic shocks, including those related to climate change. To kick-start stronger growth, today’s LICs can harness large resource endowments to, among other things, supply the green transition, and find advantage in youthful and growing populations, untapped tourism potential, and regional trade integration.

However, harnessing these factors and improving productivity hinges on engineering increased investment in human and physical capital, closing gender gaps, addressing fiscal risks, and improving governance.

For LICs in fragile and conflict-affected situations, attaining greater peace and stability is paramount. LICs will also need international support to mobilize additional resources and foster institutions that can drive durable reforms.

Throughout, policy makers should be guided by deep knowledge of country circumstances—there is no one-size-fits-all recipe for growth and graduation to middle-income status in LICs, the World Bank states.

Information source: World Bank Group, January 19, 2025.

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