Can Emerging Market Economies Prevent Importing a Financial Crisis?
A Discussion of “When Do Capital Inflow Surges End in Tears?”
Post World War II the “Powers that Be” set about building an economically interdependent global world order, governed by institutions like the IMF, the WTO and the World Bank, with the intention of preventing future global wars. If a war hurt your economic interests, then maybe it would not happen.
But economic interdependence comes with a cost — financial contagion. If one economy has a downturn, it can pull down others.
Time has shown countries grow when they are open to each other for trade and investment. But then that also means they can be hurt if the trade or investment falls off. A particularly bad downturn is called a financial crisis.
Even the best run economy can fall prey to large amounts of foreign capital coming in, which is a desirable source of investment, because it leaves them vulnerable to capital flight — the sudden withdrawal of that foreign capital.
Since the 1980s, these surge cycles, an increase in foreign capital flows followed by a matching decrease, has hit many economies around the world. The East Asian crisis in the 1990s is one such example.
