Podcast: The Four Phases Of Boom And Bust Economies

Emerging markets are vulnerable to volatility. When a crisis hits, it has the potential to stop the country’s progress. There are lots of examples of this boom and bust cycle in recent history: Thailand, Indonesia, Mexico, and now, Turkey.

On this episode of Planet Money, titled “The Young and the Restless,” hosts Cardiff Garcia and Stacey Vanek Smith dive into the boom and bust cycle of emerging economies.

George Magnus, economist and author, found that these cycles tend to happen in the same, four-phase pattern. The first is the optimism phase. In this phase, a nation’s economy experiences growth stability; interest rates are low, the stock market and real estate markets are going up, and there are higher rates of employment.

Then comes the boom phase. “The boom phase is essentially the optimism phase on steroids. The economy is growing hyper fast, people have jobs, and people are spending a lot more money,” said Garcia. More specifically, people are spending money on imports, rather than locally derived goods. At the same time, companies borrow more money – and struggle to keep up with interest rates.

All that spending and borrowing leads to higher prices for just about everything, explain the hosts. Inflation goes up, and the stock market goes way up – which attracts foreign investors. Foreign investors put money – or loans – into the country, or its companies. By the end of this phase, the emerging economy is in debt… which sets it up for the bust.

In the final stage, the risk becomes too high for investors, who pull their money out. The country’s currency can become worthless, making it harder to pay back debt. Now, the country and its companies are less attractive to investment, causing further damage to the economy.

This is what’s happening in Turkey, explained Magnus, “The four phases that I've kind of outlined here are, you know, optimism, boom, twilight and bust. I mean, it could have almost been written precisely for Turkey.”