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How to Save Emerging Economies from Another Crisis

With US monetary policymakers unwilling to consider their decisions’ international repercussions, emerging economies have little choice but to attempt to limit their exposure to US policy. To this end, they may reduce their use of dollars – a trend that is already gaining traction – or limit capital mobility.

SEOUL – As the world grapples with an inflationary surge fueled by the COVID-19 pandemic, Sino-American trade frictions, and the war in Ukraine, the United States has settled on its response: interest-rate hikes. But, while this may help the US beat back price growth, higher US interest rates intensify inflationary pressures for others, especially emerging economies.

By raising interest rates, the Federal Reserve is drawing capital toward the US economy, largely from emerging economies. As capital inflows drive up the dollar’s value, capital outflows are dragging down emerging-economy currencies. Since the beginning of this year, the South Korean won has depreciated by 18%, the Egyptian pound by 20%, the Thai baht by 15%, the Indian rupee by 8%, and the Chinese renminbi by 13%.

At the same time, inflation has soared in emerging economies. Nigeria’s inflation rate hit a 17-year high of 20.5% in August. In Egypt, inflation is approaching 15%. And in Argentina, it is forecast to exceed 100% this year. While US monetary policy is hardly the only factor, it is undoubtedly making matters worse.