America's central bank, the Federal Reserve, has begun to tighten monetary policy, by tapering – reducing its monthly purchases of financial assets. The American money-printing strategy had provided a stimulus for the US economy and benefits for the global economy, not least the developing world. But last May when the Federal Reserve first indicated its intention to start tapering, financial markets in some emerging economies reacted badly. Capital moved quickly out of developing economies as their currencies weakened. Developed markets with stronger currencies have benefited from this capital flight. Last month, the Federal Reserve finally began its tapering programme.

Loose monetary policy in the developed world, designed to ensure an economic recession did not become a depression, also helped to create a boom in emerging market economies. Investors availed of cheap credit, thanks to record low interest rates, to exploit soaring commodity prices in emerging markets. The large inflows of foreign capital that followed pushed up exchange rates, which left currencies overvalued, and economies much less competitive. As China’s economy slowed, the resulting slump in commodity prices left many emerging economies exposed. As the Federal Reserve’s tapering programme proceeds, the prospect of rising interest rates and a stronger dollar has made the US a safer and more attractive haven for investors.

So far, the volatility in developing markets has had a limited impact on developed markets: since December 31, where emerging market equities have fallen by 7 per cent, the global share index has dropped by less than half that. However, in recent years, developing economies, which account for almost 40 per cent of the world’s economic output, have been the engines of global growth. Given the size, and significance of the emerging economies, the resolution of their financial crisis will also have a bearing on the strength and sustainability of the global economic recovery.