Synthesis: Growth after the Global Recession in Developing Countries
Brazil has a large domestic market and low dependence on external demand, as well as favorable macroeconomic conditions, which enabled the government to pursue an effective countercyclical policy. The country is expected to see a very strong recovery in 2010, with GDP growth climbing to 7.0 percent; but growth is likely to slow to 4.3 percent over the medium term, roughly approximating the precrisis potential growth rate. Brazil’s low dependence on export markets and the product and geographical diversification of its exports imply that slow global demand will have a limited impact. The investment-to-GDP ratio is expected to increase from 17 percent during the crisis to 20 percent toward the end of the period. With low (and stable) saving rates, the current account balance will likely deteriorate. Brazil is expected to finance this deficit without problem, mostly through increased FDI flows. Low indebtedness should make access to foreign capital easy, and growth should not be finance constrained. But the continuation of lax fiscal policy and tighter monetary policy would constrain investment and growth. With TFP growth slightly below the precrisis level, and assuming no major structural policy changes, GDP growth is mainly determined by capital accumulation. This scenario does not take into account the effects of the recently discovered oil reserves, which should have major positive implications for Brazil. India was enjoying strong growth acceleration before the crisis; its potential growth increased from 5.5–6.0 percent during 1997–2002 to 8.0 percent during 2003–07.24 Despite the cyclical slowdown, growth momentum remained strong. India was hit hard by the crisis, mainly through the external demand channel, and reduced credit and capital flows. But growth resumed in the third quarter of 2009 as capital inflows picked up and the strong policy measures adopted began to stimulate demand. In FY2009–FY2010, the economy slowed to an average growth rate of 6.4 percent. However, in the medium term, 2011–15, growth is expected to average about 8.5 percent—above the 8 percent potential output growth estimated before the crisis. The large size of the Indian economy and the dominance of domestic factors make it less sensitive to changes in global economic conditions. While the slowdown in global growth and tighter global financial conditions may reduce the growth of exports and the volume of capital flows to levels lower than before the crisis, they are expected to remain
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