The tendency for global capital to flee ‘risky’ EM countries indiscriminately in favour of ‘risk free’ developed markets during outbreaks of global risk aversion is one of the great international market failures of  our time. This behaviour has been ubiquitous in past crises and the 2020 Coronavirus Crisis is no exception. EM countries have experienced indiscriminate outflows, regardless of their policies or fundamentals. Fortunately, today most established EM countries have local markets, so their vulnerability to outflows is significantly reduced.

However, the least developed EM countries remain completely exposed. In addition to not having sufficiently developed domestic markets to meet their financing needs they are completely cut off from international capital in crises. Unable to undertake any counter-cyclical policies, they are not only at risk of major economic crises, but the crises could potentially migrate to other countries with similar characteristics in a classic contagion dynamic.

Until now, there has been little interest in addressing the global market failures that precipitate such  tragedies. However, given the general weakness of the global economy due to coronavirus, the world can now ill afford to turn a blind eye on completely preventable crises.

We believe that it is within the capabilities of International Financial Institutions (IFIs) to design new programmes – call them global macro-prudential polices – to address global market failures. These programmes could involve credit lines to enable EM countries to buy back their own debt during periods of extreme market stress, or bond purchases undertaken by the IFIs themselves.