Felix Salmon has a good analysis on Reuters.com of the current debate over what is causing the run on emerging market currencies. Salmon cites two different opinions recently posted by Paul Krugman and Dani Rodrik on the root cause of the current difficulties in places like India, Turkey and Argentina.
Krugman, if I’m reading him right, is saying that if only US economic policy had worked better, we would have a much more vibrant economy, throwing off enormous amounts of cash which would more than make up for the taper. Employed Americans, along with fast-growing US companies, would naturally look to invest their money abroad, and the flows to emerging markets would remain healthy, thereby avoiding a crisis. Instead, we have too few employed Americans, we have overly cautious US companies, and the markets have come to the collective (and self-fulfilling) decision that the end of QE will mean the end of substantially all capital flows to emerging markets. The result is a “sudden stop” — and all sudden stops are extremely painful.
Rodrik, on the other hand, says that the current crisis is the emerging markets’ own fault, for opening themselves up to fickle and volatile capital flows in the first place. Worse, whenever these economies run into difficulty, they tend to respond by becoming even more open to international capital flows. This is a story which is bound to end in tears, no matter what the Fed does.
Salmon sides, ultimately, with Rodrik, and so do I. Whatever the impact of QE, and that is a real factor, the decision made by the governments in these countries added to the risk already inherent in the increased inbound cash flows; these leaders, more than external factors, bare the blunt of the blame.
As Tim Fernholz notes on Quartz.com:
The BRICs aren’t at risk from external factors so much as their own economic institutions, which means they at least have more control of their own fates than some other countries. Whether by opening up sectors run by the state, investing in infrastructure, finding ways to stimulate domestic demand, fighting inflation and corruption or improving financial systems, these countries have the wherewithal to make their way through a troubled global environment—if their policymakers allow it.
What’s more, this situation is not new to these countries, especially not Argentina; and with discipline and honesty, the leaders of these nations could have better managed the consequences of the inevitable Fed easing that was 100% predictable. Whatever happens to these economies and the people who depend on them, the blame lies mostly with national leaders who were happy to reap the political benefits of the cash rushes that followed QE and not QE itself.