We used to think that the 2007-2008 financial crisis set the standard for a savage global shock. But that crisis took more than 12 months to spread from the overbuilt suburbs of California and southern Spain to the financial centers of the world. The coronavirus pandemic has taken just three months to engulf first China and now Europe and North America. As it has swept west it has triggered an economic crisis whose violence is set to exceed anything we have previously witnessed.

The global shock has an uneven chronology. In the West it was the virus that triggered the financial crisis. In the large emerging markets of the world economy—the likes of Brazil, Argentina, sub-Saharan Africa, India, Thailand, and Malaysia—the virus has yet to arrive at full strength. For them, the financial shock wave is running ahead of the disease. Back to back, the two crises threaten to create an overwhelming maelstrom for emerging markets whose impact on the world economy will be far greater than any rogue U.S. president or trade war.

With their populations at risk, their public finances stretched, and financial markets in turmoil, many emerging market states and developing countries face a huge challenge. Will they have the resources to ride out the challenge? And if not, where will they look for outside assistance in an increasingly divided and multipolar world in which the United States, the European Union, and China have all been through an unprecedented shutdown?

At the head of the list of vulnerable countries is South Africa. The virus count in South Africa is heading rapidly towards a tipping point. Its health system is stretched at the best of times with a population of 7.7 million living with HIV. A lockdown has been declared. The military are being called out. Meanwhile, the rand is collapsing and South Africa’s sovereign debt has been cut by the ratings agencies to junk status. In Brazil, another of the superstars of the globalization era, President Jair Bolsonaro’s inner circle are infected. The currency was reeling even before Bolsonaro decided to discard any strategic approach to the virus. Chile, Thailand, Turkey have all been knocked back. Argentina’s much-needed debt restructuring has been blown off course. India’s stock market is plunging, its exchange rate has slumped and its banks are under pressure. Meanwhile, its booming tech industry and call centers are paralyzed. (If your insurance claim in the United States is held up, don’t be surprised. The back-office workers in Bengaluru who normally process your paperwork don’t have the laptops that would enable them to continue working from home during India’s massive lockdown.) The shock has delivered a blow not just to stock markets and government bonds. It has hit commodities too. One of the main triggers for the big sell-off came on March 6, when oil talks between Saudi Arabia and Russia broke down. Since then the relentless dumping by the main producers has driven prices down. The high-cost upstarts in the United States’ shale fields are their intended victim. But spare a thought for the other oil exporters. Think of desperately poor Nigeria. Think of fragile Algeria, where oil and gas account for 85 percent of export revenue. Listen Now: Don't Touch Your Face A new podcast from Foreign Policy covering all aspects of the coronavirus pandemic Learn More To understand the factors at play in this giant unwinding of investment in emerging markets, consider a business proposition that was iconic of 21st-century globalization: A big-name corporation in the emerging world would offer $500 million in corporate bonds offering a yield slightly above those available in the crowded U.S. market. The size of the issue meant it was included in a influential international index of bonds such as J.P. Morgan’s Corporate Emerging Market Bond Index, which since 2007 has been used by institutional investors in the West to diversify their portfolios. Fund managers would happily take the higher yield on offer from Asian and Latin American corporations whose balance sheets were often more conservatively managed than their daredevil Western counterparts. The emerging market borrower benefited from the margin between U.S. funding costs and the rates of return to be earned in fast-growing economies in Asia or Latin America. At the same time, the currencies in which the emerging-market borrower operated would likely appreciate against the dollar, eroding the cost of the loan. To finance the deal you would never need to set foot in the United States itself. Huge volumes of dollar-denominated credit circulate outside the United States. Deals such as this are done in places such as Dubai, Singapore, and Hong Kong, key nodes in the global exchange of dollar claims and liabilities. The flag carriers of this globalized world were the likes of Emirates and Cathay, huge international airlines with no domestic market to call their own. Between 2007 and 2019 the value of internationally traded emerging market corporate debt almost quintupled from $500 billion to $2.3 trillion. And, over a similar period, foreign investors bought up one-quarter of the local currency sovereign bonds issued by emerging-market governments, helping to pay among other things for impressive new infrastructure. Observers of the world economy have been warning for some time that this global debt mountain harbors risks. This is particularly true for so-called frontier borrowers, high-risk low-income countries, whose commercial hard-currency debt tripled over the five years to 2019 to more than $200 billion. At the end of 2019, almost half of the lowest-income countries in the world were already in debt distress. Now the entire logic of emerging-market investing has gone into reverse. As investors everywhere run for safety, the dollar has surged, making dollar debts more expensive. Commodity prices have tanked. With China, Europe, and the United States shut down, exporters of manufactured goods and commodities have no one to sell to. Hardly surprising that the stock markets from Jakarta to Sao Paulo are in free fall. Emirates, the iconic airline of globalization, has shut down. In the past week, gigantic fiscal and monetary efforts have breathed a flicker of life into stock markets. The sell-off has been too massive for investors not to hunt for bargains. A huge injection of dollar liquidity has pushed the dollar off its highs. But the actual recession in the world’s developed economies has only just begun, and the pandemic has not even arrived in full force in the emerging markets yet. Read More The Coronavirus War Economy Will Change the World When societies shift their economies to a war footing, it doesn’t just help them survive a crisis—it alters them forever. Argument | Nicholas Mulder The pandemic is not the first shock that emerging markets have recently faced. In recent decades, the gigantic flow of investment and trade that has interconnected the world economy as never before has been subject to repeated interruption. There was the dangerous miniature crisis in China in 2015, when the stock market crashed, the currency slid, and $1 trillion fled the country. A year earlier, oil prices and other commodity prices sagged, sending a shock wave through commodity producers. For many emerging markets, the general slowdown began in 2013 with the so-called taper tantrum, when rumors of a tightening in U.S. Federal Reserve policy had money sloshing back to the United States in search of higher interest rates. Ever since, many emerging market currencies have been on the skids. The prelude to the taper tantrum was the huge wave of dollar liquidity unleashed on the world economy by the Fed during the tenure of Chair Ben Bernanke. That began with the financial crisis of 2008. Emerging markets, with the notable exception of South Korea, were generally spared the banking crises of that year. The shock for them came in the form of what was up to that point the largest and most sudden collapse in global trade. 2020 will easily outdo it. What rescued emerging markets in 2008 was among other things the gigantic stimulus delivered by Beijing. China launched a credit expansion of wartime proportions, confirming the role that it had increasingly played since the early 2000s as an engine of global growth. China also towed the world economy out of an earlier phase of turmoil that spanned the period between the Asian financial crisis of 1997, Russia’s implosion in 1998, and Argentina’s meltdown in 2001. The crisis in Argentina was particularly severe, resulting in the closure of the entire national banking system, mass rioting, and the evacuation of the humiliated president by helicopter. Since the 1990s, in short, as much as the emerging markets have benefited from globalization, they have also had to deal with intense volatility. The crises of 1998 and 2001 scarred Russia and Argentina deeply. What we have witnessed in recent months, however, is unprecedented, because it is a comprehensive and almost indiscriminate sell-off on a gigantic scale. There is a playbook for an external shock of this kind. It isn’t what we used to call the Washington Consensus, the pristine free-market version of 1990s globalization. That approach was buried for good in the wake of 2008. Measures that might once have been considered scandalous, such as capital controls to limit the inflow and outflow of funds, have since been approved not only by desperate national governments, but by the International Monetary Fund (IMF). In the summer of 2019 no lesser authority than the Bank for International Settlements (BIS), the international club of central bankers, issued a frank summary of how highly globalized emerging markets have learned to deal with financial risks. This advice had three components. First, national governments should use large foreign reserves to supply dollars to their financial systems and slow an excessive devaluation of their currencies. The BIS then advises preemptive regulatory interventions in the balance sheets of corporations—banks, financial funds, and industrial corporations such as oil companies—that are large enough by themselves to upset the national economy. Finally, as a way of stanching an excessive capital movement, the BIS, like the IMF, admits that capital controls may be necessary. For the BIS and IMF to be endorsing capital controls is, as the Economist remarked, a bit like the Vatican giving its blessing to birth control; removing capital controls was the totemic policy of globalization from the 1970s to the 1990s. But the evidence of recent decades is undeniable. The risks of unlimited financial integration are simply too great, especially in an era in which the Fed, the European Central Bank, and the Bank of Japan are engaging in massively expansive monetary policy. Though neither the BIS or the IMF say so in so many words, these are in fact precisely the kinds of tools that Beijing has used to manage the rise of the Chinese economy since the 1990s. This is the “Beijing Consensus” that dare not speak its name. The Chinese have set a high standard, and the current crisis puts the model to a stern test. Many emerging markets have followed the Chinese example in accumulating large foreign currency reserves, although South Africa and Turkey in particular are thinly armed in light of their outstanding debt obligations. As for the recommendation to police risks in corporate balance sheets—so-called macroprudential management—that is always a tough proposition in political terms. Banks are influential and politically well connected. Huge state-owned corporations such as Eskom in South Africa, Petrobras in Brazil, and Pemex in Mexico generate risks that are hard to manage. Finally, resorting to capital controls when a country is under pressure is a risky business, because it may spook the market and further escalate the movement of capital that it is trying to calm. The emerging markets’ situation is made even harder to manage by the fact that financial markets in London and Wall Street are gyrating and the major economies of the world are either in, or just barely escaped, free fall. In a world riding out a massive, simultaneous shock, what is the point of strength on which emerging markets should anchor themselves?