How vulnerable are emerging markets to external shocks?

Abstract

This paper finds that external economic conditions have significant effects on emerging market (EM) economies, accounting for up to half of the variance in their growth rates. Stronger growth in advanced economies generates stronger EM growth, more so for those EMs with stronger trade ties with advanced economies and less so for those that are financially more open. Adverse external borrowing shocks hurt EM growth, more so for those with greater financial openness or those with limited policy space. China itself has become an important external driver of growth in other EMs. However, internal factors also matter in determining EM growth, and in the period since the global financial crisis these factors have been hampering growth for some EMs. The persistent dampening effect from internal factors in recent years suggests that trend growth could be affected as well. In sum, EMs may be entering a more challenging period of slower growth in the period ahead, reflecting both external and internal conditions.