Episode Overview

Title: What Caused Those Dramatic Emerging Market Currency Dives?
Host: Lawrence MacDonald (Center for Global Development)
Guests: Liliana Rojas-Suarez (Senior Fellow, CGD), Arvind Subramanian (CGD & Peterson Institute)
Date: October 7, 2013

Main Theme:
This episode dives deep into the recent steep declines in emerging market currencies (2013), unpacking the causes, implications, and policy responses. The conversation focuses on whether these swings reflect deeper structural vulnerabilities, the lessons from Latin America, and an intense debate about the merits/drawbacks of financial openness, using India, Brazil, and China as case studies.

Key Discussion Points & Insights

1. Why Are Emerging Market Currencies Plummeting?

• Liquidity reversal after the Global Financial Crisis:
  • Central banks’ quantitative easing flooded markets with liquidity, which is now being withdrawn as US economic recovery signals the end of zero-rate policies.
  • Investors are reassessing risk/return, pulling capital from emerging markets back to advanced economies.

  “This re-accommodation of portfolio… is driving the outflows from emerging markets back to developed countries, which of course means pressures on the exchange rates, on the interest rates and on the prospect for growth.” (B/Liliana, 01:28)

• Notable Statistics (as of the week prior to recording):
  • Indian rupee: -20%
  • Indonesian rupiah & Brazilian real: -15%
  • Turkish lira: -10%
• Pace of Depreciation is Key:
  • Not concerned about depreciation per se, but about the speed.
  • Sudden drops risk “currency mismatches” that hinder countries’ ability to meet debt obligations.

  “I’m concerned that it’s so sudden that they find themselves unable to make good on their external debt obligations.” (B/Liliana, 03:41)

2. Lessons from Latin America

• Some Latin American countries (e.g., Colombia, Peru) buffered their economies by:
  • Building reserves
  • Implementing macroprudential regulations (e.g., countercyclical capital/reserve requirements)

  “The lesson from these Latin American countries… is that they have these instruments in place, which means that now, when… there are problems in the banking system, there will be sufficient liquidity.” (B/Liliana, 04:28)

• India has acted late; similar reforms are only just starting.

3. India’s Unique Vulnerabilities

• Arvind’s Perspective:

  • India’s issues are deeper and “homegrown.”
  • Key vulnerabilities:
    • Growth slowed sharply (from ~11% to 4.5% in just 2.5 years)
    • Large fiscal deficit (9-10% of GDP)
    • High inflation (~10%)
    • Persistent current account deficits, fueled in part by gold imports

  “India has been very vulnerable. Fiscal deficit about 9-10% of GDP. Inflation is about 10%… export and imports have huge imbalances.” (C/Arvind, 07:03)

• Growth Model Issues:

  • India’s boom was concentrated in high-skilled services; left out the unskilled population.
  • Manufacturing never took off due to regulatory barriers.

  “The share of manufacturing and GDP… China’s been 34%, India’s peaked at 17% and is now down to 14%.” (C/Arvind, 09:23)

  • India is losing competitiveness in IT services, e.g., the Philippines now rivals it in call centers.

4. Comparing India, Brazil, China

• Brazil:
  • Manufacturing harmed by previous real appreciation (capital inflows made currency too strong).
  • Now, depreciation is “supporting the manufacturing sector.” (B/Liliana, 10:59)
  • Persistent expansionary fiscal policy; has not reversed stimulus, further exposing vulnerabilities.
• China:
  • “China is a great example. Its currency actually went up.” (C/Arvind, 05:48)
  • China’s model is based on low-wage manufacturing and avoiding financial integration, which insulated it from volatile flows.
• India & Brazil: Both face issues of fiscal expansion, electoral politics, and missed manufacturing opportunities.

5. How Capital Flows Impact Countries Differently

• Symmetry in Capital Flows:
  • Liliana: Outflows create as many challenges as inflows, especially if adjustments are abrupt.
• Asymmetry Angle (Arvind):
  • Inflows are “undiscriminating”—everyone benefits when “risk” is overlooked.
  • Outflows are “discriminating”—those with large current account deficits (India, Indonesia, Brazil, South Africa, Turkey) suffer most.

  “There seems to be a kind of asymmetry in the way these kind of global markets work.” (C/Arvind, 12:26) “A rising tide lifts all boats, but a falling tide leaves some stranded on the rocks.” (A/Lawrence, 13:36)

Financial Openness: The Big Debate

6. Should Countries Open Their Financial Markets?

• Arvind: Advocates Caution—and Looks to China

  • China’s spectacular and stable growth is attributed to its refusal to open its capital account.
  • “China… has chosen not to integrate itself to global financial markets… It’s been an export powerhouse… and it doesn’t go up and down with the ebb and flow of global finance.” (C/Arvind, 15:06)
  • Suggests Africa is “very very open” to flows without sufficient institutional underpinnings.

• Liliana: Sequencing & Domestic Readiness

  • Openness is beneficial but only with “the right sequencing”:
    • 1. Trade liberalization
    • 2. Domestic financial sector soundness
    • 3. Open to FDI/long-term flows
    • 4. Open to short-term capital flows last
  • Warns: “If the domestic financial system is weak, and I believe it is [in China], then I think that it’s not ready to be opened.” (B/Liliana, 17:09)
  • Criticizes the notion that China is a model to emulate, given its “lack of transparency” and institutional weaknesses.

• Political Drivers in Financial Policies

  • Arvind highlights “ideology and interests”—countries’ elites and external actors (Wall Street, Washington) have vested interests in promoting openness, sometimes contrary to systemic stability.

  Cites Jagdish Bhagwati’s “Capital Myth” about the unique risks of capital account liberalization. (C/Arvind, 20:55)

• Liliana’s Counterpoint:

  • No financial system is free of ideological/political influence.
  • China’s refusal to adjust its currency upwards was damaging to other emerging markets, forcing their currencies higher and eroding competitiveness.

  “China has been hurting emerging market economies too… The fact that China was not adjusting was actually hurting emerging markets.” (B/Liliana, 22:16)

Notable Quotes & Memorable Moments

• What scares the economists:

  “What could hit the economist is that a sudden stop of the inflow that brings a huge depreciation… creates huge currency mismatches between assets and liabilities.” (B/Liliana, 03:17)

• On asymmetry of capital flows:

  “There’s kind of an undiscriminating nature when capital pours in. But… when it comes out, investors are much more discriminating.” (C/Arvind, 12:30)

• Macro development challenge in India:

  “How do you generate, how do you create an economy that’s going to generate jobs for these low skilled people?” (C/Arvind, 09:57)

• Seesaw problem with capital flows and exchange rates:

  “If China didn’t appreciate, the other had to appreciate to correct… So the fact that China was not adjusting was actually hurting emerging markets… So it’s not like it’s a panacea.” (B/Liliana, 22:16)

• Risks of openness for ill-prepared economies:

  “Sub Saharan Africa—no way it should be so open to capital… well before China, well before Latin America, they’ve been very open. So the question is, why?” (C/Arvind, 18:32)

• Metaphor for emerging market stress:

  “A rising tide lifts all boats, but a falling tide leaves some stranded on the rocks.” (A/Lawrence, 13:36)

Timestamps for Key Segments

| Timestamp | Segment | |-----------|---------| | 01:28 | Liliana explains the mechanics of capital outflows and their impact | | 03:06 | Host lists dramatic recent currency losses; discussion on pace of depreciation | | 04:28 | Latin America’s approach: reserves and macroprudential regulation | | 05:44 | Arvind details why India’s situation is especially precarious | | 08:00 | Discussion on models—the difference in India’s and China’s growth story | | 09:23 | Arvind on India’s manufacturing gap versus China | | 10:34 | Is Brazil more like China or India? | | 12:26 | Asymmetry in capital flows (inflows vs. outflows) | | 15:06 | Arvind’s case for the Chinese approach to capital controls | | 17:09 | Liliana’s “sequencing” model for financial liberalization | | 20:55 | Arvind references Jagdish Bhagwati on the capital myth | | 22:16 | Liliana on China’s non-adjustment and effects on others | | 23:10 | Arvind: China’s good for itself, bad for others—a fundamental system problem |

Conclusion

This episode offers a nuanced, multi-layered analysis of dramatic currency falls in emerging markets in 2013, balancing immediate triggers (US policy shift) with countries’ structural preparations (or lack thereof). The intellectual heart of the episode is the unresolved—and lively—debate between Rojas-Suarez and Subramanian: Should developing countries open their financial markets, and if so, how and when? Their disagreement reveals deep tensions between stability, growth, policy sequencing, and the unpredictable consequences of global financial integration.

Essential listening for anyone interested in the real-world challenges of managing capital flows, exchange rates, and economic development in a turbulent global environment.