But such reliance on exports can become a liability if export demand shrinks which can happen for reasons exogenous to the emerging economy. There is obviously a trade off here. Self-insurance, as defined by reserve build up through aggressive exports, offers protection against financial contagion, but it also makes the economy vulnerable to trade contagion.
How do we balance this trade off between vulnerability to financial contagion and vulnerability to trade contagion? Another relevant issue is that self-insurance may not be necessary, indeed may be redundant, if international collective arrangements – regional or multilateral – can provide easy, quick and unconditional liquidity during a crisis.