Saturday, June 13, 2009

The Return of the "Decoupling" Myth

. Saturday, June 13, 2009

Given the carnage that has spread across the developing world as a result of the economic crisis that originated in the U.S. and Europe, it would seem to be a strange time to resuscitate talk of "decoupling". The term refers to the ability of states in the developing world to grow their economies independent of business cycles in the developed world. And yet, according to this FT report, the idea is coming back in vogue:

Yet decoupling – which was so popular as an idea at the end of 2007 and early 2008, as many of the emerging markets continued to rally in spite of the credit crisis – is gaining traction once again.

The main cheerleader is Jim O’Neill, chief economist of Goldman Sachs and the inventor of the Bric acronymn for the world’s four biggest emerging markets of Brazil, Russia, India and China in 2001.

Mr O’Neill says there is “considerable decoupling going on” as investors switch to emerging market assets as they reckon many of these economies can grow more strongly than the developed world.

He thinks China, in particular, can lead the world out of its slump – as it relies increasingly on domestic demand rather than on exports in order to grow.

Now a statement of opinion from a Goldman Sachs analyst should always be taken with a grain of salt. But more interesting than the source is the claim the source makes: is China coping with the global crisis by boosting domestic demand? It doesn't appear so. But China's decision to stimulate the economy through infrastructure investment and stockpiling of commodities (as a hedge against price inflation when global demand recovers) has given a boost to commodity-exporting nations. From the FT article:

Optimism about Chinese growth has led directly to a revival in commodities markets. Dalinc Ariburnu, global head of emerging markets at Deutsche Bank, says: “There is no question that emerging markets are benefiting disproportionately from the surge in commodities, given that earnings of commodity firms account for close to 50 per cent of overall earnings in the emerging market economies.”

Emerging equity funds have seen inflows of $10.5bn since the Chinese stimulus package, according to EPFR Global, the data provider. That compares with an outflow of $46.73bn in developed equity funds.

This does not signal that developing countries are winding down their dependence on demand for their exports from MDCs, since China's increased orders of commodities used as inputs for production anticipate a strengthening of future demand for the exports from the developed world. For developing countries to decouple, they would have to break from an export-led growth model to one that emphasizes domestic demand. So far none of the BRIC countries, much less poorer commodity exporters, have managed to do this. In fact, none of them have even attempted such a shift. Markets remain highly integrated, and a collapse in one state will set off a domino effect that affects the entire system. This is especially true when it is the core economies that falter. So let's drop the talk of decoupling, and instead focus on dealing with the side effects of integration, which is the real concern.


The Return of the "Decoupling" Myth
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