A Brave New Monetary World
He who follows historical truth too close at the heels is
liable to be kicked in the teeth.
(Sir Walter Raleigh)
Every decade seems exceptionally turbulent and eventful to those who live through it. Even so, those affected by the operation of the international monetary system in the decade from 1997 could reasonably make this claim. The period opened with the Asian crisis, a shattering event for a region accustomed to stability and one in which exchange rates played a central role. Crises in Brazil, Turkey, and Argentina followed ad seriatim. The message seemed to be that emerging markets were incapable of managing the explosive combination of capital mobility and political democracy.
But no sooner had observers reached this unhappy conclusion than peace broke out. There were no more emerging-market crises of consequence between late 2002 and 2008. In part, this reflected favorable external circumstances. Low interest rates and ample liquidity made debts easy to service once the Fed cut interest rates to stave off deflation. The world economy expanded strongly, not just because of accommodating credit conditions but also because of the emergence of China and India as growth poles. High tides lift all boats, and the high commodity prices flowing from strong expansion of the global economy lifted the balance-of-payments positions of commodity exporters worldwide.
Worldwide booms not lasting forever, there were still worries that, if global growth slowed, instability would return. Emerging markets do not acquire the institutional strength of high-income countries overnight.1 Their banks have weak controls, their financial systems are illiquid and opaque, and their corporate governance is often rudimentary. The fact that standards in emerging markets drew closer to those in the high-income countries in the
1This is, after all, why they are referred to as “emerging” rather than “emerged.”