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Innocent Bystanders

SANTIAGO – Take a taxi in São Paulo nowadays and you will experience the maddening traffic and untidy streets of an emerging-country metropolis. But when the time comes to pay for the ride, you may feel like you are in Boston, Luxemburg, or Zurich: the value of the Brazilian real, like the currencies of many emerging-market countries, is high – and could go higher.

Strong currencies make strong countries, a senior United States policymaker used to say. Many emerging-country exporters, struggling to retain customers in the wobbly US and European markets, feel otherwise.

For decades, developing countries dreamed of a nirvana of sky-high commodity prices and rock-bottom international interest rates. But perhaps finance ministers in Lima, Bogota, Pretoria, or Jakarta should have been more careful about what they wished for. The problem? An invasion of short-term capital flows fleeing the slow-growth, low-interest-rate advanced countries.

Meeting in Calgary last month, the Inter-American Development Bank reported that $266 billion entered Latin America’s seven largest economies in 2010, compared to less than $50 billion a year, on average, between 2000 and 2005. And while only 37% of inflows in 2006 were “hot money” that can leave at a moment’s notice, last year such inflows accounted for 69% of the total.