Emerging economies need coordination and reforms

Some emerging economies, such as Brazil, India, South Africa, Indonesia and Turkey, saw large-scale outbound capital flow, currency devaluation and stock market plunges recently, caused not only by the US Federal Reserve’s announcement at the end of January that it will cut its monthly bond purchase by $10 billion again, but also by some countries’ political and economic turmoil, says an article in 21st Century Business Herald. Excerpts:

A pressing question is if the emerging markets’ problems will give rise to a new round of regional financial crisis, such as happened to Asia in 1997.

The answer may be no, because the interconnectivity of the global economy is much deeper now than in 1997 and there are so many interrelated trades in the world today. The emerging market countries’ currency exchange policies are also more flexible than before.

The emerging market countries cannot solve the issues only by blaming the US Federal Reserve, whose decisions are based on the United States’ domestic situation instead of international needs. That the emerging market countries embraced the liquidity created by the US quantitative easing policy in the first place was to stimulate their own economic growth.

That the countries are affected by the US Federal Reserve’s policies proves that they still rely on the developed countries’ capital and markets. That imbalance was the root cause of a series of previous crises and brings periodic turmoil to the global economy along with changes in US financial policies.

All emerging market countries should be sober-headed and try to prevent shocks caused by their reliance on the developed economies. But the shortsighted election politics of some of these countries deprives their governments of suitable soberness.

The Chinese government has conducted strict capital administration and thus will not be tempted by the short-term inflow of capital.

In the future, some weak emerging market countries will probably be trapped in a quagmire and their difficulties may be dispersed on a larger scope, infecting some other countries.

Yet, it is believed more emerging market countries can overcome their difficult situation, because their politics are stable and most governments are committed to carrying out reforms. No matter how important foreign factors are, the real crises always originate from domestic conflicts. The political instability of some countries will influence investor confidence and will also delay much-needed restructuring reforms at home.

The Chinese economy will be an important factor affecting the emerging markets and even the global economy in the future. In the past few years, China’s domestic demand has promoted the prosperity of global staple commodity export countries. But the decline of China’s infrastructure construction and housing markets will further depress these countries’ exports and aggravate their shortage of capital.

If China falls into crisis, the developed countries’ recovery will be affected. If China can withstand, if not resolve, the current difficulty, the emerging market countries’ crisis will only be partial.

Thus, it is predicted that the emerging economies and the globe will enter a slow adjustment featuring shocks. Different countries should strengthen their coordinated and mutual assistance to look for a solution together.