High-growth recoveries do not follow recessions, says IMF working paper

By Reshmi Basu

New York, Aug. 8 - Recessions are not followed by high-growth recovery phases, according to a International Monetary Fund working paper titled "Growth Dynamics: The Myth of Economic Recovery," written by Valerie Cerra and Sweta Chaman Saxena.

The authors said their paper seeks to answer whether output losses are fully recouped after a country experiences a crisis, shock or downturn. For instance, following an economic downturn, is there a high-growth recovery phase?

In theory, crises and other shocks may temporarily limit output, but future growth may offset the initial decline. Crises may facilitate political or economic reforms. Also, recessions may cleanse the economy of inefficient firms, the authors noted.

The paper, which represents the researchers' views, not official IMF policy, looked at three types of recovery as seen in Nigeria, Sweden and Swaziland to determine which type of "recovery experience" is more prevalent. Output for Nigeria recovered quickly following its steep recession from 1965 to 1968.

Following its banking crisis in the early 1990s, a small fraction of output loss was recuperated by Sweden.

On the opposite side of the spectrum, Swaziland's growth climbed after a shallow recession in 1987.

Through statistical analysis of panel studies, the authors find that after a recession, "growth rebounds at a rate significantly below that of an average expansion year. Given the failure of output to revert to trend line, countries experiencing many shocks tend to fall behind."

The paper also illustrated that "political and financial crises are costly at all horizons. Crises contributed to half of the episodes of negative growth, and there is no evidence that they typically lead to economic reforms or policy adjustments that restore output to trend," the authors noted.

The authors found that change to a more democratic government system "improves the rebound from a recession."

There is also evidence that while trade liberalization increased the long-run growth rates, it can also slow down recovery from a recession, the researchers said.

"However, such weak recoveries tend to occur in a combination with liberalized capital account regimes, possibly as a result of restricted access to financing for imported intermediate inputs as the confidence of international investors is slow to return."

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