For decades, emerging economies followed a brutal script during global financial panics. Spooked investors would flee. Currencies would plunge. And to stem the chaos, central banks would increase interest rates, crushing their own economies to defend exchange rates and contain inflation.

But according to the latest World Economic Outlook from the International Monetary Fund (IMF), something fundamental has changed.

The IMF examined 16 major global financial shocks since 1997, from the dot-com crash to Covid-19. Before 2008, these episodes hammered emerging economies. Six months after a typical shock, output would contract by 1.8% and inflation would jump nearly a full percentage point.

Since 2008? Output falls by only 1%. Inflation barely budges. Sovereign bond spreads now rise just one-fifth as much. The improvement is so pronounced that emerging markets now weather global shocks almost as well as rich countries do.

The Credibility Revolution

The transformation stems from a quiet revolution in monetary policy. Central banks in countries like South Africa, Chile, and Thailand spent years building credibility by consistently hitting inflation targets.

The mechanics matter. When currencies depreciate, imports become more expensive. In the past, that would trigger wage-price spirals as workers and businesses expected inflation to accelerate. Now? Inflation expectations stay anchored. Before the crisis, if short-term inflation forecasts rose, three-year-ahead expectations would climb in lockstep. After the crisis, that link disappeared. People trust inflation will return to target.

This changes everything. With expectations anchored, exchange rate depreciation no longer packs the same inflationary punch. Central banks can tighten less aggressively and focus on supporting growth rather than desperately defending the currency.

Strong frameworks also broke emerging markets' "fear of floating." When central banks constantly intervened to stabilise exchange rates, businesses never developed hedging tools. Why pay for insurance when the central bank provides it for free? Without hedging markets, the financial system stayed fragile, making intervention seem necessary.

Countries with well-anchored inflation expectations now intervene far less.

Stronger policies limiting foreign-currency borrowing also kept debt from ballooning as local currencies weakened, making depreciation less dangerous and reducing the need for intervention

Central banks also stopped bending to fiscal pressure. Before 2008, when governments increased spending, central banks would often keep rates low, accommodating the fiscal expansion. Since then, spending increases are met with rate hikes instead, keeping long-term inflation expectations anchored. This independence matters: when central bank governors are removed for political reasons rather than performance, inflation expectations jump 1.7 percentage points within six months.

Luck and Skill

Improved policy deserves much credit, but emerging markets also caught breaks. Advanced economies grew steadily. Global financial conditions stayed loose.

The IMF's analysis separates luck from skill: policy frameworks explain 0.5 percentage points of better growth and 0.6 percentage points of lower inflation. Favourable external conditions added another 0.5 percentage points to growth but didn't help with inflation.

The hardest part, anchoring expectations, was all about better policy.

What Comes Next

Despite progress, three shadows loom. External conditions can flip quickly. The pandemic pushed debt sharply higher, eroding fiscal space. And hard-won credibility can evaporate, political interference, weakened fiscal rules, or policy backsliding can unravel years of gains.

The question isn't whether emerging markets improved, the data settles that. It's whether they can sustain these gains when the external environment turns hostile and the temptation to backslide grows strong.