Sorry times at club med: why the next emerging market crisis won't involve an emerging market.

• Author: Lachman, Desmond

Once when asked a woman's age, Oscar Wilde replied that she was approaching thirty. He added, however, that she was approaching thirty from the wrong side. On considering whether emerging market economies are converging towards those of the developed economies, one might arrive at a similar conclusion. Yes, emerging market economies have over the past few years made some improvement to their economic fundamentals. However, the main reason for their convergence towards the developed economies is that there are a number of developed countries whose economic fundamentals are deteriorating at an even more rapid pace than those in the emerging markets are improving.

The point is perhaps best illustrated by a reply I received from a seasoned Wall Street trader when I recently asked him where he thought that the next emerging market debt crisis would take place. Without missing a beat, he replied that it would occur in Greece, Italy, or Portugal. For on examining each of those three countries, he found that their public debt levels and their public debt dynamics were appreciably worse than those in the major emerging market economies such as Brazil, Russia, India, or China.

In assessing whether an emerging market economy might be "converging," one usually looks at a number of standard yardsticks. Is the country exercising increased discipline over its public finances in a manner that might be reducing the relative size of its public debt? Is the country implementing basic structural reforms that might place its economy on a higher and more sustainable growth path? Is the country granting real independence to its central bank with a view to attaining relative price stability? And is the country implementing policies that might be promoting its external sector and that might be reducing its external vulnerability?

By those very yardsticks, over the past few years, a major emerging-market economy such as Brazil, which as recently as October 2002 was considered to be on the verge of default, has made great strides. Taking advantage of a highly favorable external environment, President Lula's government has followed highly restrained economic policies that have put the Brazilian economy on a sounder footing and that have substantially reduced Brazil's external vulnerabilities.

A striking example of Brazil's efforts to improve its economic fundamentals is the fact that in each of the past four years, the Brazilian government has achieved a primary...