Rapid Growth in Emerging Markets and Developing Economies: Now and Forever?

Most forecasts for emerging and developing economies reflect excessive optimism that is both statistically significant and economically relevant, according to a study of forecasts for horizons of up to 20 years in more than 100 countries. This Policy Brief argues that for rapidly growing economies, forecasters overestimate the persistence of growth. Forecasters for poorly performing economies, on the other hand, expect that growth will not simply revert to the mean but rather will exceed it. The size of such optimistic forecast errors could cause a large shock that poses risks for macroeconomic policy management and debt sustainability, with the potential to plunge a stable country into debt crisis within one or two decades. To correct excessive optimism, forecasters should give greater consideration to adverse shock or low growth scenarios. Less optimistic scenarios should be at the forefront of policymakers' and investors' deliberations, because they are probably more realistic than the existing baseline scenarios.