Monday, November 06, 2000

A hard landing for emerging markets This interesting Financial Times piece shows how risk aversion in the United States can lead to difficulties for emerging markets. This is interesting because how countries become interdependent through globalism is often rather strange.

Emerging market economies are linked together by oligopolies of speculators. What makes this troublesome is not that the investment is speculative, but that it is oligarchical. This means that, say, Brazil is necessarily exposed to, say, Russia, merely because the same sorts of people who invest in Russia also invest in Brazil. There is no solid underlying principle for this economic connection, it is an artefact of the way emerging markets are financed. Three solutions: 1) More globalization (diversify the investor base), 2) A larger domestic investor base (also good for diversity), and 3) Short positions on other emerging market currency (a hedge).

I have not seen many people twig this, and it is something I have a little first hand experience with, so I will write more about it in upcoming weeks.


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