The most likely crisis facing emerging markets is one centred on a failure to control inflation, according to the chief economist at the International Monetary Fund (IMF).
Simon Johnson wrote in an article published last week that such a crisis could coincide with a global economic slowdown that could in turn hit trade.* “The danger is that emerging markets could now be perfectly positioned for negative experiences very much akin to those seen in the richer countries during the 1970s,” he wrote.
In his view price expectations were not well measured in emerging markets. He implied that they could be unrealistic. He acknowledged that some emerging economies had adopted inflation targeting but he was not certain how much difference that would make.
Johnson also described exchange rate policy as the “Achilles’ heel” for some emerging markets. If interest rates are tied to America and the Federal Reserve loosens monetary policy it can have an inflationary impact on emerging markets.
But Johnson conceded an inflationary crisis is not inevitable. He said key emerging economies should “act quickly to slow down their economies and – most important – move to allow more exchange flexibility, which will allow them to run independent monetary policies appropriate for their own conditions”.* “Straight Talk: Emerging Markets Emerge”, Finance & Development, September 2008. Available at www.imf.org