Author: Gordon Platt
Harvard economist Jeffrey Frankel says that we are in the boom phase of the third consecutive cycle of capital inflows to developing countries and that the next emerging-market meltdown won’t happen until about 2010. “It’s the Biblical rule: seven fat years followed by seven lean years,” he says. “In the first seven fat years we were recycling petrodollars, which ended in the 1982 debt crisis, and then we had seven lean years.”

The second cycle was the emerging-market boom of the early 1990s, which ended in the Asian financial crisis in 1997 and was followed by seven lean years. And in 2003 we entered the third boom, Frankel said at an IMF globalization forum in Washington.

New crises will come, but they won’t necessarily be currency crises, Frankel says. They could be bursting real estate bubbles or stock market collapses. The next disaster will happen when there is somebody new on the trading desk who did not personally live through the last crash, according to Frankel. “They sort of know about it, but it is easier for them to say the world has changed [and there won’t be another crash] than if they lost money in it,” he says.

Frankel says many emerging markets are using the current inflows to build up reserves instead of financing current account deficits.

Gordon Platt