It presents set of indicators to gauge the vulnerability of individual emerging economies to various shocks, including:

• a slowdown in import demand in both China and the United States
• a fall in primary commodity prices
• increased costs and lower availability of external financing
• alternative patterns of exchange rate changes
• pressures operating on monetary and fiscal policies in emerging economies

The paper does not set out to identify the one or two emerging economies most vulnerable to a crisis today, nor does it offer a probability assessment on the likelihood of a crisis this year. Instead, it is a speculative exercise with the aim of throwing light on policies that can improve crisis prevention and resolution.

The main points of the paper are:

• potentially, an overlapping growth slowdown in China and the United States, along with deterioration in global financial conditions linked to a disorderly correction of global payments imbalances, could put emerging markets on the threshold of a new financial crisis
• it makes a great deal of difference to emerging-market prospects if the US/China slowdown is or is not accompanied both by a large increase in emerging-market interest rate spreads and by a large decline in private capital flows to them

The author concludes by asking: what might be done to reduce the risk and to strengthen the forces of crisis prevention going forward?. They recommend that there is a primary need to make the payments-adjustment process more orderly and more effective by:

• putting in place a plan in the US that reduces the structural budget deficit to less than 1 percent of GDP by 2010
• ensuring that the the ECB in Europe is cautious in raising interest rates so that domestic demand growth in the European Union can grow faster than output growth
• getting more appreciation of key Asian currencies, so that the needed second wave of dollar depreciation can be both broadly distributed among non dollar currencies and large enough to perform its expenditure-switching function

The author recommends that emerging countries should:

• continue to work toward reducing high public debt ratios and currency mismatches
• take action to remove large over and undervaluations of their real exchange rates
• adopt transparent frameworks for the conduct and evaluation of monetary policy, build deeper local bond markets, and increase efforts to reduce the fragility of domestic banking systems