A massive exodus of capital from emerging economies has left many in a Catch-22 position, where adopting the kinds of monetary and fiscal stimulus measures the rich world is deploying could perversely make things worse.
Interest-rate cuts can help households and companies, but in an increasing number of countries they’re driving rates so low that they don’t even compensate for inflation — adding to incentives for foreign funds to pull out. And fiscal expansion can prompt the kind of funding concerns that still afflict emerging nations, raising the prospect of credit rating downgrades and calls for international rescues.
"We should be worried about emerging markets,” said Barry Eichengreen, a University of California Berkeley economist. In addition to suffering disproportionately from the collapse of commodity prices, supply chains, trade and spending, they’re facing "clearly, the mother of all sudden stops” in capital flows, he said.