Is the lesson of the most recent bout of turmoil in the emerging world “emerging market economies have changed, but the markets have not”?

How have emerging economies changed since 1997, the last time money flowed their way in a big way?   Fundamentally, by saving rather than spending the commodity windfall, and by saving rather than spending the huge wave of capital that flooded emerging economies the past few years?   Obviously, there are exceptions – Eastern Europe, Turkey, India (now) and with oil prices high, Thailand and Korea -- all run current account deficits.   But in aggregate, the emerging world has a big current account surplus despite attracting (til the last two weeks) big capital inflows.

Some countries in my view have taken prudence to such excess that their prudence has become a risk.  China won’t use long-term capital inflows from FDI, let alone short-term flows to finance a current account deficit.  As a result, its burgeoning reserves are contributing to a domestic credit bubble, barely restrained by administrative controls.  Too many oil exporters still budget for oil at $25 and, since they peg to the dollar, often have weaker real exchange rates now than in 1998, when oil was $15.  

But there also have been real changes in places that needed real change.   Brazil has eliminated two of its three major vulnerabilities.   Its external debt is way down, its exports are way up.   It has basically eliminated its domestic dollar-linked debt (good move).   Alas, the combination of high domestic rates, lots of short-term debt and a relatively large fiscal deficit has proven a bit more intractable.   Turkey addressed one major vulnerability – its fiscal deficit is basically gone.   Of course, it also has a big housing and consumption driven current account deficit.   That too is a real vulnerability.  But with something like 70% of the Istanbul stock market in foreign hands, big falls in the lira and Turkish stocks now hurt London and New York more than the Turkish banks … at least one hopes.   

Important changes, all.  The emerging world looks very different today than it did in say 1997, at the peak of the previous wave of capital inflows from New York, London and Tokyo.