Eswar Prasad, Tolani Senior Professor of Trade Policy in the Dyson School and Senior Fellow at the Brookings Institute, spoke to the PBS Newshour last night about the recent jitters on Wall Street and how they are being generated by market instability in the emerging world. Prasad, a leading expert in monetary policy and emerging markets, described how the current market volatility in the so-called “fragile five” economies – Turkey, India, Brazil, Indonesia and South Africa – is being caused by concerns over the slowdown in the Chinese economy and by the possibility of tightening in U.S. monetary policy by the Fed. As he describes in greater detail in his new book, The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance, such tightening would result in higher interest rates on U.S. bonds, tempting investors away from emerging market economies, which are seen as risky and having uncertain prospects for growth.
The good news, according to Prasad, is that the current volatility is unlikely to lead to anything as severe as the Asian financial crisis of the late ‘90s.
“Many emerging markets in fact have learned their lessons,” he said. “They have more flexible exchange rates, which means they’re not trying to protect a particular level of the currency. They don’t have as much external data as they used to have a couple decades ago, and they have much more foreign exchange reserves, which means a lot more protection from financial crises.
"But it is still a very rough road ahead for these emerging markets because now foreign capital has stopped coming in.”
You can learn more about Prasad’s new book here.
