Emerging Markets Must Shift Their Focus Inwards

Emerging markets can prepare for a slowdown in the US by allowing their currencies to appreciate in value and developing new products for their own consumers, advises Raghuram Rajan, finance professor with the University of Chicago and former chief economist of the International Monetary Fund. The transition – as developing nations shift from making products for Americans and Europeans to providing services for their own citizens – will require institutional discipline, wariness about inflation and flexible labor markets. Adding to the challenge, the countries can anticipate attracting the attention of global investors and speculation, along with current account and fiscal deficits, overpriced housing, mismatched currency borrowing and overvalued exchange rates. A shift in focus on the part of developing nations will raise consumer prices in the wealthy nations. “Effective inflation targeting and the associated moderation will become more difficult to sustain as emerging market excess capacity and competition diminishes,” writes Rajan about the developed nations. “Fiscal discipline will become more necessary, even as slowing growth puts pressure on budgets.” – YaleGlobal