Emerging Markets Emerge

• Pages: 54-55

Emerging markets are now a key determinant of global growth. This is good news-and a potential problem

Page 54

Twenty years ago, "emerging markets" was the label for countries that were just starting to interest a broader class of investors worldwide.

These countries were perceived as having strong (but unrealized) prospects while being somewhat peripheral to the main functioning of the global economy. Ten years ago, many of these emerging markets faced major crises.

They had clearly become big enough to shake the financial world, at least in some disturbing moments in 1997-98. The label "emerging markets" meant instability, or at least some form of volatility.

Today, emerging markets-or, perhaps more descriptively, middle-income countries-have emerged as a major determinant of global prosperity. Over the past five years, these countries have accounted for between one-quarter and one-half of global growth (depending on how it is measured). They have also weathered the recent global financial disturbance well and, through growing financial and trade linkages, have helped keep advanced economies from slowing down. and, now, the way emerging markets handle the latest round of inflation challenges will have profound effects on growth and inflation around the world.

How did emerging markets become so economically influential? What are the implications? and-from a global macroeconomic perspective-are there potential future costs, as well as benefits?

What happened?

Remember that there have always been a lot of people living outside what we call the developed countries. Of today's roughly 6 and a half billion people, only about 1 billion live in relatively rich countries. But for a long time, for various reasons (related to colonialism, communism, and common policy mistakes) most of the world's poor countries experienced relatively little economic growth.

This began to change in the 1960s as a range of developing countries put in place economic policies that produced growth, and the world economy experienced a sustained boom. Many fast-growing developing countries experienced serious bumps, or even the derailing of growth, in the 1970s and 1980s; in fact, this is when the IMF seriously entered the business of lending to emerging markets. The 1980s were for some countries-particularly in latin america-a "lost decade," with little growth.

Relatively few countries have sustained high...