This document discusses problems faced by emerging markets (EMs) versus developed markets (DMs) in the international political economy and potential policy solutions. It outlines five main problems EMs face: 1) development challenges, 2) financing new capital, 3) foreign direct investment versus foreign portfolio investment, 4) instability of international money, and 5) managing currency valuation. It then evaluates four potential solutions: 1) austerity, 2) default, 3) capital controls, and 4) running a permanent trade surplus. It questions whether there is a better system than the current hierarchical global financial order and concludes by reiterating the initial question around the differences between EMs and DMs in terms of credit risk versus interest rate risk.

1. Summary
Hierarchy in the International Political Economy And Policy Choice

2. We Started With a Question
What is the Difference Between an EM and a DM?

3. Problem 1: Development

4. Problem 2: How to Finance New Capital
Onshore US Dollar
Onshore US Dollar Credit
Offshore USD Credit
(Eurodollar/Eurobonds)
Domestic (EM’s) Money
Domestic (EM’s) Credit

5. Problem 3: FDI V.S. FPI

6. Problem 4: International Money is Unstable

7. Which Raises Your Borrowing Costs and
Causes Money to Flee

8. Problem 5: Managing Your Currency vis-à-vis
the World
Pegged Currency
Free Float
Capital Controls

9. Solution 1: Austerity

10. Solution 2: Default

11. Solution 3: Capital Controls

12. Interlude: Intervening in FX Markets

13. Solution 4: Prevention Through Permanent
Trade Surplus
• Current Account Balance + Financial Account Balance + Capital
Account = 0
• Current Account:
Exports – Imports
• Capital Account
Net change in asset values, transfers from abroad
• Financial Account
Sale of Assets – Purchase of Assets

14. Solution 4b: SWF If You Can

15. The World Continues to Be Hierarchical

16. Is There a Better Way?

17. What Is the Difference Between an EM and
DM?
Credit Risk V.S. Interest Rate Risk