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Emerging Economies’ Misinsurance Problem

LONDON – Over the last decade, America’s expansionary monetary policy and China’s rapid growth have been the two key drivers of global financial flows. Now, both dynamics are being reversed, generating new risks for the global economy – particularly for emerging countries. Whether they can cope with these changes will depend on whether they have taken out enough insurance against the right risks.

Following the Asian financial crisis of the late 1990’s, emerging economies began to accumulate massive foreign-exchange reserves to protect themselves against the risks of external over-indebtedness. In fact, they amassed far more than they needed – $6.5 trillion, at last count – effectively becoming over-insured against external balance-of-payments shocks.