With most of the world focused on economic instability and anemic growth in the advanced countries,developing countries, with the possible exception of China, have received relativelylittle attention. But, as a group, emerging-market economies have beennegatively affected by the recent downturnin developed countries. Can they rebound ontheir own?

The major emerging economies were the world’s main growth enginesfollowing the eruption of the financial crisis in 2008, and, to some extent,they still are. But their resilience hasalways been a function of their ability to generate enough incremental aggregate demand to support theirgrowth, without having to make up for a large loss of demand in developedcountries.

A combination of negligible (or evennegative) growth in Europe and a significant growth slowdown in the United Stateshas now created that loss, undermining emerging economies’ exports. Europe is amajor export destination for many developing countries, and is China’s largestforeign market. China,in turn, is a major market for final products, intermediate goods (includingthose used to produce finished exports), and commodities.The ripple effect from Europe’s stalling economy has thus spread rapidly to therest of Asia and beyond.

Moreover, not only is the tradable sector ofJapan’s economy highly vulnerable to a slowdown in China, but the recentconflict over the Senkaku/Diaoyu Islands raises the prospect of economic decoupling. Apart from that, Japanese economicperformance is set to remain weak, because the non-tradableside is not a strong growth engine.

The key questions for the world economy today, then, are how significantthe growth slowdown will be, and how long it will last. With wise policyresponses, the impact is likely to be relatively mild and short-lived.

One key issue clouding the future is tradefinance. European banks, traditionally a major source of trade finance,have pulled back dramatically, owing to capital-adequacy problems caused by sovereign-debtcapital losses and, in some cases, losses from real-estate lending. This vacuumcould reduce trade flows even if demand werepresent. In Asia, especially, filling thevacuum with alternative financing mechanisms has become a high priority.

In particular, although China’stradable sector is highly exposed to developed economies, the government islikely to accept some short-run slowdown, rather than adopting potentially distorting stimulus measures. Given the risk ofre-inflating asset bubbles, no one shouldexpect a dramatic easing of credit of the type that followed the 2008 meltdown.

An accelerated public-investment program that avoids low-return projects is not out of the question. But the best and most likely responses arethose that accelerate domestic consumption growth by increasing householdincome, effectively deploy income from state-owned assets, and strengthen China’ssocial-security systems in order to reduce precautionary saving. Indeed, theseare all key components of China’srecently adopted 12th Five-Year Plan.

Admittedly, China’smajor systemic reforms await the country’s leadership transition, now expectedin November. By most accounts, the pace of reform directed at expanding themarket side of the economy needs to pick up quicklyto achieve the ambitious economic and social goals of the next five years.

Some countries have bucked the globaltrend. Indonesia, forexample, has experienced accelerating growth, with rising business and consumerconfidence boosting investment to almost 33% of GDP.

Likewise, Brazil’sgrowth has been dented, but now looks set torecover. Moreover, overall economic performance in Brazil masksan important fact: growth rates have been substantially higher among thecountry’s poorer citizens, and unemployment is declining. The aggregate growth rate does not capture thisinclusiveness, and thus understates the pace of economic and social progress.

The main challenge for Brazilis to increase its investment rate from 18% of GDP currently to closer to 25%,thereby sustaining rapid growth and economic diversification. Commodity dependence, even with the creation ofconsiderable domestic value added, remains high.

Economic-growth rates in other systemically large countries, including Turkey and Mexico, have risen as well, despiteEuropean and US headwinds. Many Africancountries, too, are showing a broad pattern of sound macroeconomicfundamentals, durable growth acceleration, economic diversification, andinvestor confidence.

The outlook for India’seconomy remains more uncertain. While growth slowed recently from very highrates – owing to a combination of exposure to developed-country weakness,internal loss of reform momentum, and declining investor confidence – thattrend appears to be reversing after recent decisive corrective moves by thegovernment. The main question is whether India’s parliament will passcrucial legislation or remain paralyzed byhyper-partisan, scandal-fueled infighting.

Combining this general picture with more general developing-country trends– rising incomes, rapid growth in middle classes, expanding trade andinvestment flows, bilateral and regional free-trade agreements, and a growingshare of global GDP (roughly 50%) – these economies’ growth momentum shouldreturn relatively rapidly, over the next 1-2 years.

Most of the downside risk to thisscenario lies in the systemically important economies of Europe, the US, and China. To derailemerging economies’ growth momentum at this stage probably would require eitheran additional major demand shock from the advanced economies, or some kind offailure in China’sleadership transition that impedes systemic reform and affects the country’sgrowth. Notwithstanding low growth forecasts for the entire developed world, thesesystemic risks, taken individually and in combination, appear to be declining(though certainly not to the point that they can be dismissed).

On balance, then, the multispeed growth patterns of the past decade arelikely to continue. Even as the developed economies experience an extendedperiod of below-trend growth, the emergingeconomies will remain an important growth engine.