With the purpose of increasing their liquidity safeguards and stabilizing real exchange rates, official reserves in emerging economies, accumulated through sterilized interventions, precluded current account adjustment, artificially boosting tradable sector growth. This led to global imbalances and, so the argument goes, facilitated (or even caused) global financial unrest. BIS Review 124/2010  1  The above argument depends on whether capital inflows to emerging economies, which were indeed substantial in 2006–2008 (see Figure 1), are driven primarily by interest rate differentials or by medium term growth prospects. It is noteworthy to see how these interest rate differentials have evolved over time. Figure 2 plots (simple) average monetary policy rates for a group of developed and emerging economies, as well as Chile. It is striking that, whereas on average it stood at 440 basis points (bp) between January 2006 and July 2008, now it is barely 50 bp lower (390 bp). Intriguingly, market expectations for interest rate differentials hover between 400 bp and 450 bp over the next year. It would require substantial sensitiveness to interest rate differentials to make the argument that these are the main drivers of capital inflows. Moreover, the decade from 1996 to 2005 witnessed an average differential above 1000 bp, affected of course by risk premia, but still indicates that crude short-term interest rate differentials by themselves are not suggestive of substantial capital inflows. In terms of growth prospects, the picture is markedly different. Figure 3 presents IMF’s past data and forecasts for economic growth in developed and emerging economies.
They also have had to pay more attention to evaluating business opportunities by using more sophisticated risk/return analysis than they previously did, a strategy financial firms have been particularly aggressive in pursuing. What lessons might other countries thus draw from the US experience and what are the implications of the strong economic performance in the United States for other countries? One lesson seems clear. With the advances in technology, all countries that move toward more open and transparent markets stand to benefit from the universally available strides that have been made in information technology. I want to emphasize that the processes I am speaking about do not call for just onetime efforts. Quite the contrary. They demand ongoing attention and adaptation to new circumstances. Second, it is not just that productivity growth is being driven by technological advances. It is also a question of how these technological advances are applied. At the end of the day, I believe, the United States has had such strong economic performance because of the high degree of flexibility and adaptability that has been built into the US labor, product and financial markets over the past decade. BIS Review 29/2000  4  These lessons seem to be gaining a following, as many countries across the globe have begun to record substantial progress in liberalizing and deepening their capital markets, deregulating their state-owned enterprises, and easing existing labor market rigidities. In so doing, these countries position their economies to capture the manifold benefits technological advances allow them to enjoy.