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Decoupling to world: "I'm still not dead yet!"

Sunday, January 11, 2009

The last time that some version of the title you see above appeared in these pages was way back in November, before the financial market crisis had so infected the global economy that those uttering the word "decoupling" were merely scoffed at, instead of the typical response today which is the eliciting of a huge belly-laugh.

Recall that the theory of decoupling posits that emerging market economies such as China might fare better than their developed economy brethren as the world-wide slowdown gains pace, an idea that, over the last few months at least, has fallen squarely on its face.

So much for the short-term.

As for the longer term, an increasing number of analysts are starting to look at such things as internal credit markets, saving rates, and a host of other factors while at the same time dismissing some of the commonly held views of emerging markets, the most notable example of such being that emerging economies are far too dependent on exports to the West to survive on their own.

Such is the case in this report in The Economist:

Over the five years to 2007, emerging economies grew by an annual average of more than 7%. But in the past three months their total output may have fallen slightly, according to JPMorgan, as the fall in exports was exacerbated by a sudden drying up in trade finance. For 2008 as a whole, average growth in emerging economies was still above 6%, but recent private-sector forecasts suggest that this could slip to less than 4% this year. That is grim compared with the recent past, though still robust set against an expected 2% decline in the GDP of the G7 countries.

Short-term pain is only to be expected. But some economists argue that emerging markets’ longer-term prospects have been badly hurt by the global financial crisis. From Brazil to China, they claim, the boom was driven largely by exports to American consumers, easy access to cheap capital and high commodity prices. All three props have now collapsed. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates.

Yet emerging economies’ reliance on America is often exaggerated. The surge in their total exports as a share of GDP since 2000 might, on the face of it, suggest that their boom was powered by rich-world demand. But their dependence on exports to developed countries has barely budged, at just under 20% of GDP (see chart 1). Most of the growth in exports has been within the developing world.

For sure, emerging economies will not return to their exceptional growth rates in 2007 (no bad thing either, since many of them were overheating). But it is equally wrong to assume that they cannot recover until America rebounds. There are good reasons to believe that emerging markets’ share of world growth will continue to climb (see chart 2).

Gerard Lyons, chief economist at Standard Chartered, argues that most emerging economies are not plagued by America’s deep structural problems, such as an overhang of debt, which could cramp growth for several years. Although 2009 will be a painful year for poorer countries, those with high savings and modest debt could recover fairly quickly. On many measures, such as government and external balances, emerging economies look much sounder than the big rich ones.
During the past five years virtually all emerging economies boomed. Now their fortunes will diverge much more. The most important factor determining how they cope with the recession in the rich world will be whether they are high savers, able to stimulate their own economies, or big borrowers. If international investors continue to shun risk and rich-world governments swamp markets with their own borrowing, it will be hard for emerging-market governments to issue bonds and for banks and firms to roll over debts. Some developing countries will therefore remain sluggish for longer than others.

Overall, however, their long-term prospects remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. That word “decoupling” may yet get dusted off again.
By the looks of the recent economic data coming out of Asia, the word "decoupling" may be quite dusty by the time it has to be dusted off.


This week's cartoon:


albrt said...

You are right that the folks talking about decoupling were very early. But over the next year or two, showing better growth than the US may not be a very high bar to clear. After that the decoupling can begin in earnest.

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