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The Secret to Emerging-Economy Immunity

Just as a virus can afflict the healthiest of people, a crisis can sweep up even a well-prepared economy. That is why countries must look beyond preventive measures and strengthen their ability to support a speedy recovery.

BEIJING – Next month, policymakers and experts will gather in Bali Nusa Dua, Indonesia, for the Annual Meetings of the International Monetary Fund and World Bank Group. The location is fitting: Indonesia was at the epicenter of the Asian financial crisis that erupted just over 20 years ago. That crisis carries important lessons for the current turmoil in emerging markets like Argentina and Turkey.

Predicting whether today’s problems will actually bring about a crisis like that of 1997-1998 is an exercise that I will leave to others. Nonetheless, it is worth comparing the circumstances surrounding the crisis a generation ago to those prevailing today, in order to discern better which emerging economies are most vulnerable.

There are significant similarities between events of the last few years and the run-up to the 1997-1998 crisis. Following the recession of the early 1990s, the United States maintained low interest rates and an accommodative monetary policy, just as it did after the 2008 global economic crisis. In the middle of that decade, the US Federal Reserve began gradually tightening its policy – much as it is doing today – with the federal funds rate peaking in 1995.