The global financial crisis saw the genesis of a new global economic geography, with nations divided into two groups: exuberant and anaemic economies.
Exuberant economies are dominated by emerging economies in South America, Asia, Sub-Saharan Africa, and the Middle East and North Africa (MENA). Anaemic economies are dominated by advanced economies and those emerging regions that are closely connected to them: Emerging Europe and Central America.
Exuberant countries share some key structural characteristics. They export a significant share of their goods and services to other exuberant economies; are net commodity exporters; have a low dependence on remittances flowing from advanced economies; and offer ample opportunities for investment in capital-intensive and interest-rate-sensitive sectors of the economy.
But the divide between anaemic and exuberant economies escapes any easy classification. This new configuration of the world economy implies a complex redistribution of economic power and a new web of economic relations (and maybe also of geopolitical interests).
Although the new economic geography has been largely beneficial for emerging countries, it has come at a price. The financial crisis and resultant collateral damage continues to subject global capital markets to recurrent episodes of financial turmoil. Moreover, given the seriousness of the crisis in Europe, a new episode of turmoil, potentially more severe and prolonged than the Lehman episode, cannot be ruled out.
This begs the question of how resilient emerging markets are to such an event. To address this question we analyzed two sets of indicators: external liquidity indicators, which measure the ratio of short-term external and domestic debt amortizations to international reserves; and external macroeconomic vulnerability indicators, which measure the required adjustment in imports necessary to close any given current account deficit in a context of a drought of capital flows.
With the exception of Emerging Europe and Latin America, where the external liquidity indicator is above or close to the 100% critical threshold, emerging markets appear strong enough from a liquidity perspective to sustain a new episode of financial turmoil, even if access to credit markets is shut-off for a considerable period of time.
This is not the case when the vulnerability to macroeconomic risks is factored in. An outbreak of a more resistant strain of the Lehman-type virus would require many emerging countries to undergo severe macroeconomic adjustments and face problems associated with a sharp deterioration of economic fundamentals.
Latin American countries display the highest levels of macroeconomic vulnerability, while Emerging Asia and MENA display the lowest levels of vulnerability. Moreover, exuberant regions such as South America and Sub-Saharan Africa display the largest increases in macroeconomic vulnerability to adverse global conditions. In fact, these two regions are now much more vulnerable than they were at the beginning of the global financial crisis.
Ironically, exuberance breeds vulnerability. The same economic forces that in the post-crisis world created the conditions in which many emerging countries could flourish – cheap and abundant capital and financial resources – are inherently capable of creating havoc in global capital markets and stripping emerging economies of their bonanza in the blink of an eye.
This necessitates three policy priorities. First, governments should take note of this exuberance-vulnerability paradox and set monetary, fiscal and macro-prudential policies to mitigate the build-up of future fiscal and financial risks, rather than buying into the exuberance wave.
Second, the international community should ensure that the IMF and other multilaterals are adequately capitalized and able to perform the same role in the event of a new episode of financial turmoil. This is a particularly relevant consideration at a time when the resources of the IMF might be strained by the crisis in peripheral Europe.
Finally, exuberant, cash-rich emerging market players have high stakes in ensuring that the current global order is not disrupted by a new and perhaps more virulent strain of the Lehman-type virus.
Ernesto Talvi is chief economist and academic director of the Center for the Study of Economic and Social Affairs and non-resident senior fellow at the Brookings Institution