But many EMEs also recovered quickly because they had the capacity and credibility to pursue countercyclical policies in response to large external shocks to aggregate demand for the first time. On many fiscal metrics, some economies in the emerging world now look in better shape than many of those in the advanced world. This challenges the traditional distinction between developed country and emerging market sovereign creditworthiness. Where the developed world still stands apart is in the quality of its institutions, legal and policy frameworks, and the sophistication of its technologies and markets. But even here the gap is narrowing. The story of the EMEs has generally been an extraordinarily positive one for the world as hundreds of millions of people have lifted themselves out of poverty. Nevertheless, even before the crisis, it was evident that the relationship between developed and emerging economies was becoming strained and needed to be adjusted; the status quo would clearly be unsustainable. Consider, for example, the economic relationships between the United States and China that prevailed over the past decade or so. Some experts have summarized the arrangements as follows. The United States bought Chinese exports at low prices, which bolstered U.S. living standards and held down U.S. inflation. The United States did not take extreme steps to try to force China to revalue the renminbi upward against the dollar, and China, in turn, invested its trade surplus and capital  2  2  Figures are real GDP-weighted indexes for each group. BRICs include Brazil, Russia, India and China.
William C Dudley: US economic policy in a global context Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Foreign Policy Association Corporate Dinner, New York, 7 June 2011. *  *  *  It is a pleasure to have the opportunity to speak here this evening and I would like to thank the Foreign Policy Association for inviting me. The Association has served for decades as a catalyst for developing awareness and understanding of global issues and for providing nonpartisan forums for informed discussion. Your mission is clearly a worthy one – now more than ever. In this discussion I will highlight how the recent financial crisis and its aftermath have accelerated the shift in the relative importance of the so-called developed and emerging market economies. I will then discuss how the global economic system needs to adapt in light of the growing relative importance of the EMEs in the global economy. I will explore the implications of these changes for U.S. economic policy and I will also touch on some of the challenges the EMEs face as they seek to consolidate their gains and sustain their success. I will argue that the developed countries and the EMEs need to adjust in mutually supportive ways. In my view, the current relationship between the EMEs and the United States is not sustainable for either side.