Emerging economies have again e taken the lead. Not only have they resumed their place as leading engines of global growth but—less noted in the media and of greater fundamental importance—they have also followed monetary and fiscal policies that are much more prudent than those of the United States, Japan and most other developed nations. It is for good reason, then, that emerging markets and their currencies have captured the attention of the investment community both here and abroad.

Considering the export dependence of these emerging economies, they have done remarkably well in this global recession. Late in 2008 and earlier this year, their export engine stalled as sales to recession-beset Europe, the United States and Japan fell in some cases by more than 20%. But remarkably, after initial setbacks, the emerging nations, most particularly China, managed to recapture a fair measure of their former growth momentum through fiscal and monetary stimulus. So while the United States, Europe and Japan suffered declines in real economic activity from July 2008 until recently, many of these economies returned quickly to growth.

In fact, China never stopped growing. Its pace of real economic expansion has averaged annualized rates of 6% to 8% (admittedly slower than the 10% to 12% rates of previous years, but still attractively robust compared with the developed world). India, too, continued to show real growth at around a 6% annual rate (also slower than the 9% to 10% rates of previous years, but still enviable by the standards of the developed economies). Other emerging economies, including Brazil's, also showed some overall economic declines as exports to the developed world fell off.

As 2009 has progressed, however, all have shown more definite signs of recovery than have any of the developed economies.

Impressive as their general economic performances have been during this difficult past year, and inclined as it has made investors toward emerging markets and their currencies, policy fundamentals generally look even more attractive compared with those of the developed economies, especially the United States. The differences are particularly stark in the area of public finance.

The budget deficit in the United States, for instance, has soared from a manageable 2% of the nation's gross domestic product (GDP) in 2007 to a threatening 10% in fiscal 2009. Administration projections suggest that deficits will continue to be large for years to come, and the outstanding government debt will soon rise from about 65% of GDP at present to more than 100%. Relative deficits in Japan and Europe are only slightly lower. Meanwhile, Japan's debt outstanding already exceeds its GDP by a factor of two, while in Europe, many governments have more debt outstanding relative to GDP than does the United States.

In contrast, China's budget deficit, even with the huge financial stimulus program of the past 12 months, remains well contained. The deficit in China has risen, to be sure, from less than 1% of GDP to just under 3%, but that still compares well to America, Europe and Japan. India's budget deficit does as well, though at 6% it is larger than China's. Even Brazil, which has a huge interest burden from a legacy of past deficit financing, is running a budget surplus after considering interest expenses-and its outstanding debt burden, at just over 40% of GDP, is far less than comparables in the United States, Japan or Europe.

There are some general caveats with emerging countries that must be mentioned. These securities tend to be less liquid, especially subject to greater price volatility, have a smaller market capitalization and have less government regulation. They also may not be subject to more extensive and frequent accounting, financial and other reporting requirements as securities issued in more developed countries. There also can be a greater risk of loss resulting from problems in security registration and custody as well as substantial economic or political disruptions.

That said, these emerging economies are not using as much monetary stimulus as are the developed economies. In all the established countries, the monetary authorities have pumped considerable liquidity into their respective financial systems in order to alleviate the effects of the recent financial crisis.

The efforts in Japan and the United States have driven short-term interest rates down to almost zero. In the case of the U.S., those rates, once inflation is taken into account, are firmly negative-an indicator of an easy monetary-policy posture if ever there was one. In Europe, interest rates after inflation remain positive, but just barely. Investors are aware that such radically easy monetary policies threaten inflation unless central banks take remedial action to raise interest rates and bring them more in line with reality. Though there is an expectation, or perhaps just a hope, that central banks will take that necessary action, concerns remain.