Paul Krugman calls into question the future of emerging markets ("Dutch Tulips and Emerging Markets," July/August 1995). He argues that the efficacy of the "free markets--sound money" model--the so-called "Washington consensus"--was oversold, leading to foreign investments based on hope rather than performance. The recent successes of the emerging markets, he argues, are a "classic speculative bubble," possessing no more substance than the seventeenth-century investment craze in Dutch tulips. The Mexican crisis that began last December is, Krugman concludes, "likely to be the trigger that sets the process in reverse," with "a downward cycle of deflating expectations" in store for the rest of the decade.
The fundamental flaw in Krugman's argument lies in equating the future of emerging markets with the accuracy and longevity of the Washington consensus. Certain recommendations of the consensus, such as trade liberalization, may not immediately result in growth, but underlying economic, political, and social forces have irreversibly transformed the countries usually referred to as "emerging markets." Despite predictable setbacks in the development process and some experimentation with alternative policies, these broad forces will drive continued reform, growth, and investment in emerging markets.
In his desire to make a sweeping generalization, Krugman fails to differentiate among emerging markets--the very error made by the market optimists he so correctly criticizes. But the problems Krugman trumpets are limited to certain countries recovering from the debt crisis in Latin America. While Mexico's annual real growth in GDP over the last few years has been undeniably low, increasing less than 1 percent in 1993, Thailand's has increased between 8 percent and 13 percent each of the last eight years. Indeed, Asian emerging markets have performed spectacularly over the last 20 years, going back to before the Washington consensus was even thought of; annual increases in real GDP averaged more than 6 percent between 1975 and 1982 and 7.5 percent thereafter, according to the International Monetary Fund. Chile and Colombia have also experienced steady growth over a sustained period. Even the overall long-term growth rate for emerging markets has been much
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