Tuesday, January 27, 2009

Emerging Markets, Foiled Again

Whatever happens in the world economy, developing countries always seem to get the worst of it. After the financial crises of the late 1990's, many "emerging market" countries sought to reduce their dependence on fickle financial inflows by building up reserves. This entailed running trade surpluses - selling goods in exchange for financial assets - with the perverse implication that low-income countries were net lenders to the US and other high-income "surplus" countries.

Initially, there was great hope that their fortunes had "decoupled" from the US, but, alas, they may be even in worse shape. Brad Setser puts it well:
Emerging economies who thought that they had protected themselves from sudden swings in capital flows by maintaining large reserves and running large external surpluses are discovering that their efforts to reduce their exposure to volatile global capital flows added to their exposure to a global slump in trade.

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