The writer is a senior fellow at Harvard Kennedy School
Much has been written on the disconnect between markets and the US real economy. But there’s a much bigger one in emerging markets. Many of them are floating on a tide of liquidity, and investors are seemingly oblivious to what may happen when it goes out.
Three months ago, as the pandemic spread worldwide, EM countries faced crippling capital outflows, plunging commodity prices and cratering currencies. There was $78bn of non-resident capital outflows between late January and late March, according to the Institute of International Finance. By comparison, there was less than $20bn of outflows in the three months after the 2008 global financial crisis exploded.
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