Ryan Avent: The global economy: The emerging-market squeeze: Noted for August 21, 2013

Ryan Avent: The global economy: The emerging-market squeeze

THE flow of troubling news out of emerging markets is picking up…. Growth is cratering around the region. Most news stories relate the carnage to anticipated changes in Federal Reserve policy: "tapering"…. But why should that matter?… As rich-world central banks amped up their QE programmes, many emerging markets voiced their frustration…. The international dimension of the anxieties is centered, I believe, on the fact that advanced economy measures force a choice upon emerging markets: to accept capital inflows (perhaps offsetting domestic effects by sterilisation), to stem those inflows by way of capital controls, by allowing currency appreciation, or a combination of these measures…. The bigger concern, however, may be the threat of big policy errors in response to these dynamics. Recklessly imposed capital controls could fuel panic and impair long-run growth. Worse still, central banks may strangle their economies with high rates in an attempt to protect their currencies' values. The end of QE risks squeezing demand around the world…. Tapering plans are triggering effective monetary tightening despite the fact that advanced economies remain short of demand…. Yet emerging economies may end up fighting this transition, due to worries about the knock-on effects of sinking currencies, by raising interest rates…. If policymakers aren't careful, things could end badly.