Emerging Markets’ Nirvana Lost

SANTIAGO – In the 1970’s, the great Yale University economist Carlos Díaz-Alejandro used to say that the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries. Back then, no sensible economist believed that such a state of grace could ever arrive. Yet arrive it did, and over the last decade commodity-rich countries like Brazil, Indonesia, Russia, and South Africa enjoyed its abundant benefits with abandon.

But now nirvana seems to be ending: commodity prices are down, and the mere possibility that the US Federal Reserve may end its policy of quantitative easing has raised market interest rates in the rich countries and sent funds fleeing from once-fashionable emerging markets back to safe havens in the North. Stock markets and currencies are plunging, and not just in commodity-rich emerging countries, but also in others, like India and Turkey, that had sucked in huge flows of foreign capital. Pessimists are already seeing a replay of the late-1990’s Asian crisis or, worse, an emerging-market echo of the 2008-2009 crisis in the advanced countries.