Should Emerging Markets Tighten the Belt?

Not this time. Tightening the fiscal belt when domestic economic conditions are deteriorating exacerbates the cyclical momentum of the economy (i.e., it is pro-cyclical), while good policies should smooth the cycle. The pro-cyclical fiscal policies of the past were predicated on the unsustainability of the fiscal position before shocks brought havoc and the lack of foreign financing to support a more gradual adjustment, even in the context of IMF-supported programs.

There is no global lender of last resort to help Mexico and Brazil withstand the global financial crisis

Yesterday’s events on the multilateral fire-fighting front of the global crisis are revealing: there is no global lending of last resort arrangement in place to help prequalified, well-behaved emerging markets such as Mexico and Brazil to withstand the first truly global financial crisis. The FED and the IMF have revealed what their balance sheet and governance constraints allow them to put on the table: an approximate, combined US$60 billion for each. This is not going to be sufficient, if one of these economies ends up in serious trouble, as the scale of government interventions in advanced economies shows.