In the opening weeks of 2014, a huge wave of capital fled the assets of the major emerging markets. In January, a total of $12.2 billion poured out of equities and $4.6 billion out of bonds. An additional $6.4 billion in equities and $1.95 billion in bonds decamped in the first week of February. Currency crises threatened Turkey, Argentina, and Ukraine; other key countries that rely on foreign financing — India, Brasil, Indonesia, South Africa — also seemed in danger.
Yet a few soothing words from the new Fed chair Janet Yellen stanched the panic among investors. A few days later, emerging market stocks further recovered with word that China’s banks are shrugging off the government’s efforts to rein in their creation of ever-higher levels of credit. Global investors now expect robust Chinese demand for raw materials to buoy the poor countries, drawing in their exports with the further inflation of the Chinese property bubble.
This was the second near-crisis sell-off in the emerging markets in less than half a year, but this time the outflows eclipsed the sales for all of 2013 in the space of a few weeks. Like last summer, the looming collapse was reversed on the strength of few well-timed remarks by central bankers, with no sign of repentance of the economic sins that supposedly called down investor anger.
Once again, last year’s claim is born out: “growing volatility is not a result of external forces acting upon the economy but what has become the defining output of the global economy itself.” The flows of capital being pushed through the global economy by the world’s major central banks are artificially oxygenating the decomposing body of neoliberal society. As the connection between the investors bearing this capital and the productive economy grows more and more tenuous, economic indicators and investor behavior become increasingly erratic. Even mainstream commentators recognize that the emerging markets crisis is merely in abeyance, though their interpretation of why that is so remains trapped in ideology.
One financial analyst counsels stoicism: economic crisis is the natural state of the emerging markets, so no need for undue concern. This is too glib — if an emerging market sell-off ran out of control, it could undo the illusions that keep the entire global system running. Because neoliberalism is living on borrowed time, maintaining investor “confidence” assumes an inordinately large role in forestalling global crisis.
For the moment, however, turmoil in these economies is unlikely to cause a general crisis. The poor countries just aren’t very important economically — despite holding two-thirds of the world’s people, they produce only one-fourth of the world’s value. US exports to the “fragile eight” countries represent just 0.7 percent of its gdp. Moreover, investors apparently still see the poor countries and rich countries (except Japan) as two separate destinations for investment rather than an interrelated unity, so money fleeing the emerging markets might simply inflate new bubbles in the developed economies. Reification to the rescue!
The risk posed by serial crises in the emerging markets is not so much the prospect of imminent collapse. The real danger is more long-term in nature: endemic uncertainty threatens our last best hope to put the global economy back on a sustainable foundation without facing some sort of catastrophe first.
