Emerging countries: The return of the external constraint

The repetition of crises in emerging countries since 2008 and even more so since 2014 has revived an external constraint for these countries, i.e. their inability to have structural external deficits. This is because crises dri ve up risk aversion , which results in capital outflows from emerging countries: their external deficits can no longer be financed, so domestic demand has to contract to eliminate them. The contraction in domestic demand results in particular from exchange rate depreciation, which erodes real incomes due to the deterioration in the terms of trade (the rise in the relative price of imports). Emerging countries’ inability to have persistent external deficits will structurally weaken growth in those emerging countries with low savings rates: these countries will no longer be able to have a higher investment rate than the national savings rate.