turkey currency exchange lira crisis dollar Chris McGrath/Getty Images

Has the Emerging-Economy Crisis Cycle Ended?

Judging by the limited contagion from the Turkish crisis, it seems that longstanding patterns in emerging markets may no longer apply. But that does not mean that emerging economies are in the clear; on the contrary, they still have plenty to worry about, not least an escalating trade war.

BOGOTÁ – Crises are nothing new for emerging economies, which have repeated the same patterns again and again, with often-devastating results. But have those patterns finally been broken?

Emerging economies have experienced boom-bust cycles in external financing for decades. The boom phase generates current-account, fiscal, and private-sector deficits – outcomes that are compounded by increases in domestic financing. Eventually, however, high debt levels lead to a loss of confidence and sharp cuts in external financing – a so-called sudden stop – producing balance-of-payments, fiscal, and financial crises.

Then, contagion sets in, as increasingly risk-averse investors, particularly short-term investors from developed-country markets, begin to withdraw funds from other countries to cover losses they incurred in the economies where the crises originated. With that, the crises spill across borders, affecting whole regions or even the entire class of emerging economies.

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