Editorial comment: Emerging problems Published: November 6 2000 19:51GMT | Last Updated: November 6 2000 19:53GMT

In the gloom that descended after the Asian and Russian financial crises of 1997 and 1998, some assumed that emerging market economies would take years to recover. In fact, there was a rapid return to strong growth. Only now, though, is the fragility of this recovery becoming apparent.

Global growth in 1999 and early 2000, driven mainly by US demand, meant that Asia and Latin America were able to export their way out of recession. But a series of adverse shocks has made sustaining the recovery much more difficult.

The rise in the oil price has been a serious blow for many non-oil producing emerging nations. And the slowdown in the world economy means that demand for exports is waning. The International Monetary Fund recently forecast that global trade growth will drop from 10 per cent this year to 7.8 per cent in 2001 - and even this figure could be lower if the US economy cools more rapidly than expected, or Japanese recovery falters.

Recent turbulence in the financial markets has also led investors to shun riskier assets. Credit spreads have widened and liquidity in lower grade assets has dried up, to the detriment of many emerging market borrowers. Depressed non-oil commodity prices have also made life difficult for some of the world's poorest nations.

The question now is how prepared emerging economies are for this more hostile environment. Unfortunately, many have been slow to resolve the deep-seated structural problems revealed by the financial crises.

Many of the crisis-hit economies, particularly in south-east Asia, still suffer from large overhangs of bad debt. Others have yet to tackle reforms to the corporate sector: Daewoo's troubles are a prime example of what happens when problems are deferred rather than resolved.

Overall, there is less dependence on external capital flows than there was before the crises. But some important emerging economies, including Poland and Brazil, have to finance large current account deficits.

And although exchange rates have generally become more flexible, some countries still have fixed exchange rates. While a strong case can be made for a currency board arrangement in a country with a monetary history as dismal as Argentina's, it makes the country more vulnerable to external shocks. This makes internal flexibility, particularly of nominal wages, still more important than it would otherwise be.

The only disadvantage of the rapid recovery from the crises of 1997 and 1998 was that it damped the enthusiasm for post-crisis reforms in many nations. Tougher global economic conditions will be a harsh reminder that the sustainability of recovery matters as much as its speed.

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-- Martin Thompson (mthom1927@aol.com), November 06, 2000