# 1. Introduction

EMDEs weathered the global recession of 2009 relatively well for three reasons. First, EMDEs were generally not as exposed to the financial sector fragilities that triggered the crisis in advanced economies. Second, many EMDEs had used the 2000s to reduce vulnerabilities and rebuild policy room to respond effectively when the crisis hit. Third, at the onset of the crisis, advanced economies and some large EMDEs provided unprecedented and coordinated monetary and fiscal policy stimulus, which helped shield global economic growth.

Nevertheless, the global recession slowed per capita growth in EMDEs to 0.4 percent in 2009 from an average over much of the preceding decade of close to 5 percent. The rebound in 2010-11 was initially strong but per capita growth never returned to its rates from before the global recession. Commodity exporters faced further headwinds when global commodity prices slid to multi-year lows in 2011-16 and forced commodity-exporting EMDEs to engage in procyclical fiscal tightening. Energy-exporting EMDEs were particularly hard hit by the collapse in oil prices in 2014-16.

Amid slowing growth, most EMDEs were not able to fully unwind the policy stimulus put in place in response to the crisis—fiscal deficits in the average EMDE were about as wide in 2018 as they were in 2010, and external, fiscal, and corporate vulnerabilities have increased since 2007. Several EMDEs are highly indebted, have elevated levels of foreigncurrency denominated debt, or rely on portfolio or bank flows to finance large current account deficits.

Since the global recession, structural factors have eroded potential growth. Around 2010, the share of the working-age population in EMDEs stabilized after more than four decades of rapid increases. This coincided with a prolonged period of weak investment. As a result, potential growth in EMDEs slowed by 1.2 percentage points after 2003-07, to 4.7 percent in 2013-18.

The years prior and during the global recession provided an initial encouragement to adopt business-friendly reforms, when most EMDEs improved their scores in the World Bank’s Doing Business survey. From DB2008 to DB2010, the number of business-friendly reforms undertaken by EMDEs increased from 170 per year to 243.<sup>1</sup> However, momentum for business climate reforms other than improving financial regulation stalled in DB2010, setbacks in governance appear to have returned EMDE governance indicators to their 1990s levels, and a rethink appears to be taking hold about the appropriate degree of openness to international capital flows.

EMDE growth prospects have dimmed since the global recession due to elevated debt vulnerabilities, slower momentum in structural reforms, diminished policy room to

> 1 This refers to reforms of laws, rules, and regulations relating to several activities: starting a business, paying taxes, registering property, obtaining construction permits, access to credit, getting electricity, minority investor protection, enforcing contracts, resolving insolvencies, and trade across borders. The number of reforms is calculated using the business reforms by year and by country, as listed in the World Bank’s Doing Business publications. “DB” in front of year indicates Doing Business publication year.