The world's leaders convening in Washington for the World Bank and International Monetary Fund meetings this week have been greeted by a muddled outlook for the largest economies. The United States is bouncing back but blighted by polarised politics that could yet extract a heavy economic toll. Europe is recovering at a tepid pace from depressed levels. In Japan, Abenomics is a work in progress.
But leaders will have greater clarity about emerging markets: the party is over. Gloom about these countries' growth prospects is based in large part on the deterioration in the very favourable external economic environment they have enjoyed in the past decade: high commodity prices and cheap capital. But clarity on the gloom is misplaced because medium-term emerging market growth is misunderstood.
Developing countries as a whole have been exhibiting what I have called convergence with a vengeance (Click for table). Compared to any time in recent history, many more developing countries have started catching up with the rich world and are doing so at an accelerating pace. This catch-up has persisted through the recent global financial crises, as the last column in the table illustrates.
Any assessment of the durability of this growth performance, therefore, should take account of timing. As the graph shows, the catch-up started around the early- to mid-1990s. On the other hand, the favourable external environment - the commodities boom and easy money - was more a hallmark of the first decade of this millennium. In other words, there was more to the improved performance of developing countries than merely a favourable economic environment.
Such an environment can certainly help growth in the short run, but its long-term effects are questionable. Commodities booms have seldom been the basis for durable growth in emerging markets, which underlies the phenomenon of the "natural resource curse".
Countries that have good institutions - for example, Chile - use their revenues prudently and create the conditions for sustained growth. However, most emerging market countries have weak institutions. During booms, they squander revenues, allow export sectors to become uncompetitive, postpone reforms and succumb to corruption and weak governance - all of which undermine long-run performance. President Vladimir Putin is a bigger drag on Russia when oil prices soar - making him less likely than ever to execute much-needed political and economic reforms - than when they decline.
Even if commodities booms are not harmful, their impact is mixed - for every exporter that gains from higher prices, there is an importer that will lose. Even the BRIC group is divided equally between net importers (China and India) and net exporters (Brazil and Russia).
Similarly, the impact of easy liquidity is misinterpreted. Cheap money and capital flows fuel growth booms in the short run. But the day of reckoning always comes: those that borrow most suffer the biggest growth collapses from "sudden stops" of capital. This was true in the aftermath of the Lehman Brothers crisis in 2008. It is also true in the recent turmoil that affected emerging markets, when those with the biggest capital flows in the form of current account deficits - Brazil, India, Indonesia, Turkey and South Africa - registered the greatest currency declines and financial market volatility.
It is this cycle associated with capital flows that is reflected in the finding of a recent book by Olivier Jeanne, John Williamson and me (Who Needs to Open the Capital Account?) that, over the medium term (averaging over booms and busts), growth has little association with capital inflows - except flows that take the form of foreign direct investment.
Finally, an important aspect of the external environment facing developing countries - open markets in trading partners - remains relatively benign. The US, Europe and Japan have faced large structural shocks in the form of surging imports from developing countries, especially China. They have also experienced a cyclical shock - the Great Recession. Yet they have not imposed significant trade barriers (the protectionist dog that did not bark), which augurs well for developing-country exports. With the launch of new trade initiatives in Asia and Europe, and the tantalising prospect of reforms by China, the momentum could be moving in favour of further market opening.
All this is not to say that emerging markets, or BRIC in particular, face an easy task. China must rebalance its economy away from investment towards consumption. Brazil and India must overcome macroeconomic vulnerabilities and recover their growth momentum. But these challenges are overwhelmingly domestic. In the case of India, for example, the challenge is to address the fiscal situation and improve the investment environment rather than one of attracting more foreign capital.
A changing external environment, while significant in the short run, should not be what keeps emerging market policy makers awake at night. To cry over fleeing hot money or declining commodity prices is to lament the unlament-worthy.
The writer is senior fellow at Peterson Institute for International Economics and Centre for Global Development and co-author of Who Needs to Open the Capital Account? This is an elaborated version of a piece that appeared earlier this week in the Financial Times
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