Save the Emerging Markets

Emerging-market countries are getting hammered in the financial markets nowadays, even though many of them learned the hard lessons of their own crisis-prone histories and took steps to strengthen their resilience. They are victims of a rational flight to safety, exacerbated by an irrational panic, and the advanced countries have a strong interest in providing the liquidity they need.

CAMBRIDGE – If the world were fair, most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines – if not entirely unaffected, not overly concerned either. For once, what has set financial markets ablaze are not their excesses, but those of Wall Street. 

Emerging markets’ external and fiscal positions have been stronger than ever, thanks to the hard lessons learned from their own crisis-prone history. We might even have allowed these countries a certain measure of schadenfreude in the troubles of the United States and other rich countries, just as we might expect kids to take perverse delight from their parents’ getting into the kinds of trouble they so adamantly warn their children against.  

Instead, emerging markets are suffering financial convulsions of possibly historic proportions. The fear is no longer that they will be unable to insulate themselves. It is that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the sub-prime debacle. 

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