The decoupling theory caught the fancies of the world when until last year the gradual slowdown in the US had little or no effect on the growth of the other countries and trade linkages with the US had become less important. The subprime crises which started in the US has now become a more insidious paralysis of credit conditions moving across different markets and thereby questioning the very essence of the decoupling theory. But in my view there are signs that the decoupling theory is in fact true at least to a certain extent. Let us examine them below:
Firstly, linkages between the emerging economies have strengthened. As per the IMF data the emerging markets trade with the group of advanced economies as a share of the emerging market total trade has declined from 70% to 50% whereas flows between emerging-market economies have more than doubled in the past two decades. For instance, demand for commodities from large emerging markets like China and India has bolstered growth in commodity exporters such as Brazil, Chile, and Russia.
Secondly, financial flows between emerging economies have increased. China gets nearly two thirds of its foreign direct investment from other Asian emerging countries. In turn, China has begun to undertake substantial investments in many commodity-producing countries. Other emerging markets also have built up massive stocks of foreign exchange reserves. All of this makes emerging markets as a group less dependent on financial flows from advanced economies.
Thirdly, although some emerging markets are highly export dependent, countries such as the BRICs nations are large enough to have sufficient diversity and a growing domestic demand. As per recent Merrill Lynch estimates, emerging economies could spend as much as $6.6 trillion on infrastructure in coming years. Although some projects have been delayed or cancelled due to the global slowdown, the opportunities are substantial. Also with more than 1.3 billion people in China, 1.1 billion people in India, 190 million in Brazil, 140 million in Russia, 85 million in Vietnam, 71 million in Turkey—and hundreds of millions more in other emerging economies, the potential for growth is huge.
Lastly, global stock market events since late October seem to underscore the theory. While October/November was the tough for emerging markets as a whole, the major US, European, and Japanese markets fared badly after this period. Despite the sharp recovery in March, the developed markets are still just near their October levels. With some exceptions (Eastern Europe and Mexico), the emerging markets are well above these lows suggesting strong fundamentals and healthy financial position.
In conclusion, we can say that no longer is it such that when the US would sneeze, the whole world would catch a cold. The emerging economies are now viewed as the drivers of growth in the global economy and the emerging markets have indeed decoupled from the rest of the world to a certain extent, but not completely.
Firstly, linkages between the emerging economies have strengthened. As per the IMF data the emerging markets trade with the group of advanced economies as a share of the emerging market total trade has declined from 70% to 50% whereas flows between emerging-market economies have more than doubled in the past two decades. For instance, demand for commodities from large emerging markets like China and India has bolstered growth in commodity exporters such as Brazil, Chile, and Russia.
Secondly, financial flows between emerging economies have increased. China gets nearly two thirds of its foreign direct investment from other Asian emerging countries. In turn, China has begun to undertake substantial investments in many commodity-producing countries. Other emerging markets also have built up massive stocks of foreign exchange reserves. All of this makes emerging markets as a group less dependent on financial flows from advanced economies.
Thirdly, although some emerging markets are highly export dependent, countries such as the BRICs nations are large enough to have sufficient diversity and a growing domestic demand. As per recent Merrill Lynch estimates, emerging economies could spend as much as $6.6 trillion on infrastructure in coming years. Although some projects have been delayed or cancelled due to the global slowdown, the opportunities are substantial. Also with more than 1.3 billion people in China, 1.1 billion people in India, 190 million in Brazil, 140 million in Russia, 85 million in Vietnam, 71 million in Turkey—and hundreds of millions more in other emerging economies, the potential for growth is huge.
Lastly, global stock market events since late October seem to underscore the theory. While October/November was the tough for emerging markets as a whole, the major US, European, and Japanese markets fared badly after this period. Despite the sharp recovery in March, the developed markets are still just near their October levels. With some exceptions (Eastern Europe and Mexico), the emerging markets are well above these lows suggesting strong fundamentals and healthy financial position.
In conclusion, we can say that no longer is it such that when the US would sneeze, the whole world would catch a cold. The emerging economies are now viewed as the drivers of growth in the global economy and the emerging markets have indeed decoupled from the rest of the world to a certain extent, but not completely.
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