How much was the global economic crisis made possible by a savings glut in emerging countries? While popular sentiment is to lambast securitization, bankers and even capitalism per se, a more nuanced view of the matter (and one widely embraced by economists of varying ideologies) embraces the appreciable role of emerging economies in inflating the world’s asset prices (though to be fair, said economies were awash in private capital flows from more developed nations). And while emerging countries were stung just as hard (if not harder, due to capital outflows) as developed ones from the crisis, their long-term fundamental health is not questioned. Among other changes which will be evident in international finance’s new paradigm, notes Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond investment manager, is that “multiple growth engines, largely from the developing world, will replace the single engine of growth of the US-centric twentieth century.”
One change G20 countries would like to see is a draw down on those very reserves that flowed so freely during the boom times, depressing yields even as interest rates continued to be slashed. The Economist writes this week, for instance, that the IMF’s resources will be increased by $500 billion to $750 billion, and that it will be allowed to issue $250 billion-worth of its own quasi-currency, the Special Drawing Right (SDR), to ease liquidity in emerging and developing economies. In essence, the “fund wants to provide crisis insurance to large emerging economies suffering a temporary loss of liquidity but with basically sound policies.”
The creation of a beefier but gentler IMF will give emerging economies a credible alternative to the practice of building up enormous foreign-exchange reserves. Many countries have done this in the past decade to protect themselves against fluctuations in capital flows or commodity prices. Given the opportunity to insure with the IMF, countries should have less need to insure themselves with vast reserves or to arrange large bilateral swap lines. When emerging economies have reserves worth several hundred billion dollars each, the IMF could not possibly have provided a credible alternative to self-insurance with a kitty of no more than $250 billion.
Yet skeptics worry that the social and political stigma that is (understandably) attached to the IMF may preclude leaders from knocking on its door, even when times are tough:
An almost visceral dread of having to approach the IMF, especially after the Asian crisis, was at least partly responsible for the enormous build-up of reserves to begin with.
Yet Mexico’s recent willingness to open a flexible credit line is perhaps a sign that said stigma has dampened. Gabriel Casillas, an economist for UBS Pactual in Mexico City, said the IMF loan “will in fact increase the central bank’s foreign reserves, giving…more firepower to the Mexican monetary authority to stabilize the currency. “In our view, this could make market participants concerns about Mexico’s foreign reserves level vanish completely,” Mr. Casillas said, adding that he expects the peso to surge against the dollar in the short term.