Andrés Velasco: Emerging nations' newest threat is an invasion of dollars

But when the time comes to pay for the journey, you may feel like you are in Boston, Luxembourg, or Zurich: the value of the Brazilian real, like the currencies of many similar countries, is high - and could go higher.

For decades, developing countries dreamed of a nirvana of sky-high commodity prices and rock-bottom international interest rates. But perhaps finance ministers in Lima, Bogota, Pretoria, or Jakarta should have been more careful about what they wished for. The problem? An invasion of short-term capital flows fleeing the slow-growth, low-interest-rate advanced countries.

Meeting in Calgary last month, the Inter-American Development Bank reported that $266 billion (161bn) entered Latin America's seven largest economies in 2010, compared with less than $50bn a year, on average, between 2000 and 2005. And while only 37 per cent of inflows in 2006 were "hot money" that can leave at a moment's notice, last year such inflows accounted for 69 per cent of the total.

What is going on? For a decade now, the world economy has suffered from tremendous global imbalances: massive external surpluses in countries like China, Japan, Germany, and the oil producers, matched by equally large external deficits in the US, the UK, Spain and others. The imbalances were reduced temporarily as the global financial crisis caused private demand to drop in the US, the UK and elsewhere. But, starting in 2010, the imbalances returned, and, according to the International Monetary Fund's recent World Economic Outlook, they will not shrink between now and 2016. G-20 communiqus have repeatedly pledged to secure "adjustment" and "rebalancing" in the world economy, but those promises have come to nothing.

Still-troubled financial systems and huge fiscal deficits are keeping the West's deficit countries from expanding domestic demand. And an unwillingness to trade away export-led growth is having the same effect on the East's surplus countries, especially China. As a result, emerging countries, according to the IMF, have been pressed to carry "a disproportionate burden of demand rebalancing since the crisis".

Countries running surpluses accumulate massive stocks of foreign assets, and those resources have to be invested somewhere. Before the crisis, a substantial amount of that money was invested in US Spanish, or Irish property. Today, that market is dead, and the money must go elsewhere. Europe is not currently an attractive destination, and loose monetary policy in the US has produced ultra-low bond yields there. As a result, many emerging countries have become irresistibly attractive to investors.

This dollar invasion is making macroeconomic management in emerging countries even more challenging than usual. If high commodity prices are expected to persist, then some strengthening of currencies is both desirable and inevitable. But a thin line separates orderly adjustment to changed conditions from market over-reaction. And sensible people in many emerging-country capitals are wondering whether we have crossed that line.Loss of export competitiveness as a result of excessively strong currencies is not the only problem. Massive capital inflows caused property and stock-market bubbles in the US and parts of Europe. Today, some politicians in Latin America, worried that the same thing could happen to their countries, are casting about for tools to prevent it.

As a result, the US and UK policy of so-called "quantitative easing" is going south, where it takes the form of foreign-exchange intervention. Even countries that practice inflation targeting and have otherwise vowed to let their exchange rates float - Brazil, Peru, and Chile, for example - have done it, and in large quantities.

None of these policies is without costs. They are second-best, local-policy responses to an ineffective mechanism for international adjustment. A better system to rebalance the world economy is as necessary as it is unlikely. All we can look forward to is the next G-20 communiqu.

• Andrs Velasco was Chile's finance minister from 2006 to 2010.