The erosion of policy buffers employed during the global recession made it difficult to stem the growth slowdown through countercyclical policies. The large drop in commodity prices in 2014-16 further dampened growth in EMDE commodity exporters, with growth 2.8 percentage points lower than in 2011-13, on average (Figure 6). This was exacerbated by procyclical policy tightening. As government revenues from the resources sector fell sharply and fiscal positions deteriorated, several EMDEs (Angola, Ecuador, Nigeria, Saudi Arabia) undertook fiscal consolidation despite weak growth. Adverse terms of trade movements also led to sharp currency depreciations (Angola, Azerbaijan, Colombia, and Russia), prompting central banks to raise policy rates, intervene in foreign exchange markets, or allow greater exchange rate flexibility. In commodity importing EMDEs, the growth benefits from rising real incomes due to falling prices of oil and other commodities did not materialize; instead, growth slowed by 0.6 percentage points between 2011-13 and 2014-16. Nonetheless, inflation subsided, and fiscal and current account balances improved in several countries (India, Poland, Romania, Thailand; World Bank 2015c).<sup>20</sup>

# **5. Conclusion**

Strong domestic demand and a benign external environment supported broad-based and rapid growth in EMDEs prior to the 2009 global recession. During 2002-07, EMDEs grew by 6.7 percent per year—twice as fast as during the previous two decades and surpassed only by their growth spurt during the early- to mid-1970s. As a result, the share of EMDEs in global GDP increased to 31 percent in 2007 from 26 percent in 2001. In turn, favorable economic conditions allowed EMDEs to accumulate sizeable current account surpluses and foreign exchange reserves and to reduce fiscal deficits and government debt.

Triggered by defaults in the U.S. sub-prime mortgage market, the U.S. financial system came under severe stress in the second half of 2007 and early 2008. Heightened concerns about the solvency of the financial system, the shortage of liquidity in interbank funding markets, and deposit runs at some U.S. banks triggered a financial crisis followed by a severe U.S. recession. During 2008Q3-2009Q2, U.S. output contracted by 4.0 percent—more than in any other U.S. recession since the World War II. Given the size and international connectedness of the U.S. economy, the spillovers to the rest of the world were sizeable. Although the global financial crisis originated in the United States, EMDEs were adversely affected by the collapse in global trade and finance. However, overall, EMDEs weathered the crisis relatively well: EMDE growth slowed to 1.6 percent in 2009 but output did not contract.

Some EMDEs withstood the crisis better than others. Countries that were less dependent on external trade and finance, had stronger pre-crisis fundamentals, and were able to implement swifter and more aggressive stimulus policies suffered milder growth slowdowns. China and India were among the fastest to recover, in part due to swift policy responses (IMF 2009, and 2010). LICs were also resilient as foreign aid, remittances, and FDI

> 20 EMDE commodity importers’ current account balances improved from an average deficit of 0.3 percent of GDP in 201113 to an average surplus of 0.8 percent of GDP in 2014-16. By contrast, in EMDE commodity exporters, the average current account balance deteriorated from 2.3 to -1.1 percent of GDP over the same period.

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