As emerging markets grow in influence, policymakers must be ready to manage greater spillovers to the global economy
The global economy is increasingly influenced by the large emerging markets of the G20. Over the past two decades, these economies have become much more integrated into global markets and are generating greater economic “spillovers” to the rest of the world.
As growth prospects continue to weaken in China and several other large emerging markets, policymakers in the Group of 20 emerging markets and potentially affected countries must understand the channels through which a slowdown can spread through the global economy.
As detailed in the analytical chapter of our April 2024 World Economic Outlook, spillover effects on growth from domestic shocks in G20 emerging markets have increased over the past two decades and are now comparable to those in advanced economies. We also examine how such shocks are transmitted through trade to companies and industries in other countries.
China has the largest spillover effect, now contributing as much to changes in emerging market output as the US. However, other G20 emerging markets, such as India, Brazil, Russia and Mexico, have also had an important impact on the economic performance of their neighbours.
Our simulations using multi-country, multi-sector trade models suggest that productivity declines in G20 emerging markets could drag down global output by more than three times as much as in 2000.
Industry spillover effect
In 2001, China joined the World Trade Organization. Today, the share of G20 emerging markets in world trade and foreign direct investment has doubled and now accounts for one-third of global GDP. They have become large importers of manufactured goods and large exporters of intermediate goods, especially in manufacturing and mining.
Moreover, as G20 emerging markets become more integrated into global value chains, their developments are likely to have a greater impact on overseas companies.
Faster-than-expected economic growth could boost revenues for foreign companies in sectors such as electrical equipment, machinery and metal products, which rely more on demand from emerging markets in the Group of 20. Faster growth in emerging markets, such as Indonesia and Turkey, could also help foreign firms in industries that rely more on cheap inputs.
But faster growth in emerging markets may also mean they expand downstream production capacity to make and export new products that compete directly with those produced by overseas firms. This import competition effect from low-wage countries (e.g., China and Mexico) appears to be dominant in industries that are highly dependent on foreign suppliers (e.g., textiles and chemicals).
It should come as no surprise, then, that a shock in the emerging markets of the G20 could also trigger a massive reallocation of economic activity across countries and sectors.
Our modeling analysis finds that most industries will contract, especially in Asia, due to a general decline in productivity. But spillovers are uneven, especially when productivity declines are concentrated in industries already integrated into global value chains. In this scenario, most manufacturing in the rest of the world, particularly textiles, metals and electronics, will eventually expand as companies take advantage of reduced supply from emerging markets in the G20.
The employment situation in the countries affected by spillovers will also adjust. Positive productivity shocks in G20 emerging markets can lead to job losses within the same sector as a result of increased competition, while spillovers spread through interconnected sectors of global value chains tend to create complementarities and more jobs.
Greater responsibility G20 emerging markets (especially, but not limited to, China) continue to be seen as an important source of global and regional spillovers.
Negative spillovers from the slowdown in G20 emerging market growth, especially in the wake of supply-side shocks, could jeopardize the downward path of inflation in advanced economies. In other emerging market and developing economies, such spillovers could be larger, putting economic growth and income convergence at risk.
China is a manufacturing powerhouse and highly integrated into the global economy, so its slowdown could prove particularly costly. However, the growing role of all emerging markets in the G20 means that other countries can help support the world economy. The likely acceleration in growth in these countries could have positive global spillover effects, lifting world growth by 0.5 percentage points.
Spillovers from G20 emerging markets, which cause economic activity and jobs to be reallocated among firms and industries, can be costly, but can also create new opportunities. Structural reforms, particularly in Labour markets and business regulation, can help those sectors that are likely to benefit most from reallocation. But policymakers should also adopt inclusive policies, including targeted fiscal support, to promote efficient reallocation of labor across industries and reduce the adverse effects of spillovers on income distribution.
As global economic power continues to shift, effective multilateral cooperation and international policy coordination, including by strengthening the global financial safety net to manage spillovers and minimize the risk of fragmentation, remain a priority.