Emerging, if they can

Emerging markets: The World Bank suggests that low-income countries will emerge from recession especially slowly. But actually their avoidance of overblown economic stimulus could stand them in decent stead, even though their finances are tight. Risks for the poorest countries, as well as the bulk of emerging markets, include a renewed credit crunch and creeping protectionism elsewhere.

It’s true the poorest countries have lost investment flows and aid on a scale that may endanger basic services. But the World Bank is misguided to claim that their inability to fund stimulus spending during the crisis is now holding them back. Such capital as is available can now be put to more productive use than would have been the case with stimulus programmes.

At least for the bulk of emerging markets, capital availability has improved considerably. The JPMorgan EMBI+emerging market bond index is showing a yield spread over US Treasuries back down at pre-crisis levels around 300 basis points. That’s a dramatic narrowing from a peak of 850bp in October 2008, even if it’s still a fair way from the 170-200bp spreads at the height of the 2006-07 credit bubble. It suggests creditworthy borrowers can raise funds at manageable cost.

Multilateral lending institutions have also received multiple pledges of additional finance in recent months, ensuring that the poorest governments should have access to funding, too.

But there are two big risks facing developing economies even if they follow sound economic policies themselves. The first is that recovering global financial markets suffer a relapse, either because of negative economic surprises or because rich governments mismanage the process of tightening monetary policy.

The second is that big-country protectionism crimps trade. Experience has shown that long-term improvements in living standards in developing economies generally accompany the expansion of foreign trade and investment rather than aid flows. US President Barack Obama has imposed tariffs on several types of imports, purportedly to enforce “anti-dumping” rules. But if he goes much further, or other countries start following suit, global trade flows could be seriously disrupted.

If that happened, emerging economies would suffer, probably disproportionately. Their governments need to watch for these dangers as well as doing the right thing themselves.