After evaluating the key stock balances, I now move to flows balances to uncover the dynamics governing stock balances in the economy. They include economic growth, inflation and current account balance. The left window of Figure 7 shows that the average GDP growth rates of EMEs are still above that of AEs and EMEs still contribute to global growth significantly despite the latest synchronous and protracted slowdown in emerging markets. The right window of Figure 7 reveals that the probably biggest post-crises’ success of EMEs is in the area of price stability. Prudent macroeconomic and financial policies and improved macroeconomic policy frameworks are the key factors behind this much lower inflation outcome. Among them the granting of independence to many EM central banks has been the most significant progress in improving the institutional quality of EM institutions. Their successes in lowering inflation over the years have resulted in desirable gains in monetary policy credibility. The adoption of inflation targeting frameworks provided beneficial nominal anchors and further enhanced policy credibility. To the extent that prudent policies and frameworks succeeded in achieving their targets the key dominances, especially in fiscal area, have eased and thereby the effectiveness of monetary policy increased significantly. One of the chief causes of the GFC is the existence of global external imbalances. The G20 led policy coordination has reduced the imbalances to a certain degree. In this process, some EMEs suffered from declines in their surplus levels but the others succeeded improvements. How resilient are EMEs to global financial conditions?

According to this hypothesis emerging and developing countries are unable to borrow abroad in their own currencies reflecting lower degrees of portfolio diversification at the global level to emerging currency denominated investments. Needless to say, borrowing in foreign currencies creates currency mismatch problem – increases in the cost of debt-servicing of foreign currency – denominated external obligations in cases of real exchange rate depreciation. The cost is measured in terms of the reduced purchasing power of domestic output over foreign claims following the depreciation. The original sin indicator depicted in Figure 5 shows that original sin level is much below that of the 1990s despite its rise since the beginning of 2012. BIS central bankers’ speeches  3  In other words, EMEs’ share of obligations in foreign currencies is well below those observed in the 1990s.7 Bailing out banks during the above mentioned EME financial crises put heavy burden on government budgets of EMEs. It was well-understood that banking sector plays a systemic role. In order to avoid bailout costs and disturbances to the intermediation of loans to real economy EMEs overhauled their banking sector regulatory and supervisory systems. These reforms tried to ensure that banks hold adequate capitals to be resilient to shocks and, in general, run their businesses in a prudent way. Figure 6 shows that leverage ratios measured as (risk unweighted) capital divided by total assets, on average, stayed above the average levels of the 1980’s and 1990’s and also the average ratio of advanced economy banks.