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The IMF argues that there is no clear correlation between growth and debt reduction in this

group of high-debt episodes.

Historical experience suggests that countries dealing with high debt burdens are unlikely to

experience strong improvements in their debt ratios while real rates are high and monetary

conditions remain tight. Assuming that sufficiently supportive monetary conditions can be

achieved, the IMF finds that fiscal policy focused on permanent or structural reforms appears to

provide larger and more enduring debt reductions than do policies based on more temporary

measures.

Chapter 4: Resilience in Emerging Market and Developing Economies: Will It Last?

The chapter examines the evolution of output per capita in more than 100 emerging market and

developing economies over the past 60 years. It identifies periods of expansion, downturn, and

recovery in their output paths. The IMF analyses how these durations have changed over timeand how they relate to various shocks, policies, and structural characteristics.

The main findings are:

o The resilience of emerging market and developing economies has increased markedlyduring the past two decades. They are spending more time in expansion, and downturns

and recoveries have become shallower and shorter. The past decade was the first time

that emerging market and developing economies spent more time in expansion, and

had smaller downturns, than advanced economies.

o Various shocks, both external and domestic, can negatively impact expansions in theseeconomies. Among the external shocks; sudden stops in capital flows, advanced

economy recessions, spikes in global uncertainty, and terms-of-trade busts all increase

the likelihood that an expansion will end. While domestic shocks such as credit booms

double and banking crises triple the probability that an expansion will shift into a

downturn by the following year.

o Good policies facilitate increased resilience. Specifically, greater policy spacecharacterized by low inflation and favorable fiscal and external positions and improved

policy frameworks (countercyclical policy, inflation targeting, and flexible exchange rate

regimes) are associated with longer expansions and faster recoveries.

o It is more difficult to tease out the effects of resilience on these economies structuralcharacteristics such as trade patterns, financial openness and the composition of

capital flows, and income distribution. Few of these characteristics are robustly

associated with the duration of expansions and the speed of recoveries.

o Improvements in policymaking and the buildup of policy space in many of theseeconomies account for the bulk of the increased resilience since 1990. Some shocks,

such as spikes in global uncertainty, have become more frequent in the past decade, but

other shocks have become less frequent, such as banking crises and credit booms.

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o Overall, the fact that there have been fewer shocks accounts for about two-fifths of theimproved performance in emerging market and developing economies. Greater policy

space and better policy frameworks account for the remaining three-fifths of the

improvement in their performance.

Should the external environment worsen again, emerging market and developing economies will

likely end up recoupling with advanced economies, as much as they did during the Great

Recession.

Even in the absence of an external shock, homegrown shocks could pull down growth further in

some key emerging economies.

To guard against such risks, these economies will need to rebuild their buffers to ensure that

they have adequate policy space. In response to the global downturn, policy space was rightly

used to support activity. These economies will be more resilient to new shocks if recent

improvements in their policy frameworksincluding greater exchange rate flexibility and more

countercyclical macroeconomic policiesare maintained, while policy buffers are being rebuilt.