Why is the IMF asking for more money?

Save the Emerging Markets, by Dani Rodrik, Project Syndicate: If the world were fair, most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines... For once, what has set financial markets ablaze are not their excesses, but those of Wall Street. ...

Instead, emerging markets are suffering financial convulsions of possibly historic proportions. The fear is ... that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the sub-prime debacle.

Some of these countries should have known better and might have protected themselves sooner. There is little excuse for Iceland... Several other countries ... such as Hungary, Ukraine, and the Baltic states, were also living dangerously...

But financial markets have made little distinction between these countries and others like Mexico, Brazil, South Korea, or Indonesia, which until just a few weeks ago appeared to be models of financial health. ...

[E]merging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic. The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between “safe” and “risky” assets, with emerging markets clearly in the latter category.

Economic fundamentals have fallen by the wayside.

To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed ... to stem their own financial panics: domestic fiscal resources or domestic liquidity. Emerging markets need foreign currency and, therefore, external support.

What needs to be done is clear. The International Monetary Fund and the G7 countries’ central banks must act as global lenders of last resort and provide ample liquidity — quickly and with few strings attached — to support emerging markets’ currencies. The scale of the lending that is required will likely run into hundreds of billions of US dollars, and exceed anything that the IMF has done to date. ... Moreover, China, which holds nearly $2 trillion in foreign reserves, must be part of this rescue mission. ...

In the absence of a backstop for emerging-country finances, the doomsday scenario of a protectionist vicious cycle reminiscent of the 1930s could no longer be ruled out. ...

So when the G-20 countries meet in Washington on Nov. 15 for their crisis summit, this is the agenda item that should dominate their discussion. ... The priority for now is to save the emerging markets from the consequences of Wall Street’s financial follies.

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