adjustments to the patterns
Costly or not, however, the emerging markets’ insurance strategy has wildly exceeded expectations. These economies hardly suffered during the recent crisis, as they were able to use their vast reserves to bulwark currencies, prevent capital flight, and pay for fiscal stimulus programs. Chile, under the guidance of then Finance Minister Andres Velasco, typified this resilience. Criticized during the boom years for setting aside revenues from sales of copper, Velasco was later cheered when he drew on those reserves to stimulate spending and cut taxes, thereby stabilizing the economy. His approval ratings surged from around 30 percent before the crisis to around 70 percent afterward, demonstrating that voters understood and appreciated the insurance strategy as much as economists and policymakers.
Too Much of a Good Thing?
The success of emerging markets in withstanding the brunt of the financial crisis counts as an enormous victory for the reserve accumulation strategy. But is this strategy good for all countries, and how far should it be taken? If reserves are to continue insulating economies against financial risk, their levels may need to keep pace with GDP growth.
Yet by doing so well during the recent financial crisis, many emerging economies have demonstrated that they have, or are close to having, sufficient levels of reserve funds to guard against potential disruptions. To be sure, these reserves may not permanently protect them, and so governments must remain vigilant. But they have unquestionably made emerging markets much safer than they were ten or 20 years ago, when they had far fewer reserves, especially given the low costs involved in accruing such reserves compared to suffering a financial crisis. Now that they have built safer levels of external wealth, emerging markets may feel less pressure to keep piling up reserves. This may mean that the world economy will soon enter a new and unprecedented phase of rebalancing, as adjustments to the patterns of investment, saving, and capital flows take effect. As in past eras of structural transformation, the emerging economies are growing faster than the developed ones, powered by their desire to achieve parity with developed countries in technology, industry, and living standards. The emerging countries’ share of world
Output in goods and services is already nearing 50 percent, and since before the onset of the recent economic crisis, the gap between their growth rates and those of developed markets has become wider than ever(between five percent and seven percent per year since 2006). This shift will inexorably raise global investment demand since emerging markets traditionally engage in high levels of investment.
In addition, the supply of global savings will likely de
