Growth Accelerations and Reversals in Emerging Market and Developing Economies: External Conditions and Domestic Amplifiers

Abstract

We investigate how country-specific external demand, external financial conditions, and terms of trade affect medium-term growth in emerging market and developing economies and the occurrence of growth accelerations and reversals. We find that the importance of country-specific external conditions for medium-term growth has increased over time, with external financial conditions accounting for one-third of the increase in average income per capita growth between 1995 and 2004 and 2005–14. Stronger external demand and financial conditions significantly increase the probability of growth accelerations, while a strengthening of any of the three conditions significantly decreases the probability of reversals. Certain domestic policies and structural attributes, including exchange rate flexibility, trade integration, and strong institutional frameworks, can significantly amplify or mitigate the effect that shifts in those external conditions have on growth patterns in emerging market and developing economies.