Tuesday 24 Apr 2018 | 11:35 | SYDNEY
Tuesday 24 Apr 2018 | 11:35 | SYDNEY

Decoupling's dead, long live decoupling?



19 June 2009 16:35

I’ve noted before that one of the early casualties of the current crisis was the strong version of the decoupling thesis — the proposition that the rest of the world economy, and emerging markets in particular, would be able to sail on largely unaffected by a significant hit to the US economy. 

Certainly, the synchronised fall in international financial markets, followed by the collapse in world trade and the drop in international capital flows has confirmed that in a globalised economy, major shocks have global consequences, and few countries are immune.

I also noted that a weaker version of the decoupling argument might still have some life left in it. And now, as the World Bank revises up its forecast for Chinese growth this year, and as emerging market investments have benefited from a recovery in investors’ appetite for risk, the decoupling debate is staging a comeback.

The decoupling thesis — or at least some of the ideas behind it — also received something of a PR boost on Tuesday this week, when the leaders of Brazil, Russia, India and China — the BRICs — held their first summit in Yekaterinburg. Sure, there is a fair amount of — justifiable — scepticism regarding the longevity of the grouping given the disparate interests and makeup of its members. And the subsequent leaders’ statement managed to live down to the grand international tradition of post-Summit rhetoric.

Nevertheless, in my view this inaugural meeting of some of the world’s major emerging markets, taking place in the aftermath of a global financial crisis originating in the developed world, and following on from the recent emergence of the G-20 as a key part of the international economic architecture, is a powerful symbol of the changing economic order.

As Kose and Prasad point out in a useful essay for Foreign Policy, it's actually hard to understand precisely what the decoupling thesis means. Instead, they note that it's probably more important to examine some of the underlying concepts and understand the reality of improved emerging market resilience, rather than the hype of decoupling.

The lack of clarity associated with the decoupling argument is one reason that I still prefer to think of the role of emerging markets in terms of the Great Convergence. This covers much of the same ground — the increasing relative economic importance of emerging markets and the consequent shift in geo-political power — as the decoupling thesis, but is agnostic on the net effect of (1) the increased international economic integration of those markets and (2) their growing domestic economic weight and resilience, which is central to the latter. This allows for the reality that the balance of these two forces differs significantly across economies and over time, and that increased interdependence is anyway compatible with increased economic development.

Looked at in this way, I still think the jury is out on the long-term consequences of the current crisis for the convergence process. More specifically, while I remain confident that the Great Convergence will remain one of the most important forces shaping the world economy today and in the future, for now I am nowhere near as confident that in the coming decade the convergence process will occur at the same rapid pace we saw in the boom years before 2008. 

Photo by Flickr user pasto, used under a Creative Commons license.

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