While facing many challenges, emerging markets can often recover from turmoil faster than developed economies, says Eswar Prasad

Emerging Markets Institute’s inaugural Fellow discusses the “decoupling” between the business cycles of advanced and emerging economies with audience at Johnson

Up until now, the United States and other advanced economies have set the stage for the global economic climate. According to Eswar Prasad, Johnson Emerging Markets Institute’s (EMI) inaugural fellow and senior professor of International Trade Policy at Cornell, this relationship has changed: The success of emerging markets is no longer dependent on the success of advanced economies worldwide. Hitting the ground running with its mission to expand discussion and knowledge dissemination about emerging markets, EMI hosted a discussion between Prasad and EMI co-academic director Andrew Karolyi, to students, faculty and staff at Johnson on March 3.

In his recent book, Emerging Markets: Resilience and Growth Amid Global Turmoil, coauthored with M. Ayhan Kose, Prasad discussed the globalization process, its possible outcomes, and its effects on emerging markets. The Tolani Senior Professor of International Trade Policy at Cornell, Prasad is a senior fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a research associate at the National Bureau of Economic Research.

Globalization, according to Prasad, can result in one of two outcomes. The first is a greater synchronization of the global business cycle, in which most of the economies of the world would experience booms and crises at corresponding times. The second is a greater strategic specialization among nations, which would result in less correlation between business cycles worldwide.

Following the recent economic crisis, there has been mounting evidence that the latter outcome of globalization is the most likely.  “In the past, it used to be that when the U.S. caught a cold, everyone else caught pneumonia, but this is no longer the case,” Prasad said.

Instead, there has been a significant amount of “decoupling” between the business cycles of advanced economies and emerging economies. Though the crisis had an impact around the world and the “propagation of shock” was felt in most countries, Prasad explained, emerging markets recovered much faster. “As a group, they did very well,” he said.

Despite their relative success after the crisis, Prasad explained that there remains a gradient between different kinds of emerging markets, and that some are more resilient and successful than others.

Emerging markets in Europe, for example, did not do as well as those in Latin America or Africa because of the debt they accumulated. Emerging European economies often borrowed money in foreign currencies, and were unable to pay it back, which led to constantly increasing debt.

“Emerging markets in Latin America and Africa have more insular economies because they are more isolated and they are not exposed to the same kind of borrowing and debt that emerging markets experience in Europe, so they did much better,” Prasad said.

Latin American and African emerging markets also may have done better because they maintained more reserves in the years prior to and during the crisis, but reserves are not necessarily the best way to avoid a crisis either, Prasad explained. “The lesson is that reserves are good,” he said, “but if everyone stocks up and stops investing and spending, that will be a problem too.”

Prasad also explained that though the emerging markets recovered more rapidly after the crisis because of “decoupling,” they are not immune to future global economic issues. “If we have another crisis, they will probably still get hurt. They may be decoupling from advanced economies’ cycles, but we are all still very much connected,” he said.

Reported by Maria Minsker, Cornell ’13