Decoupling: A Reality or a Myth???

A couple of years back ( late 2007), before the market meltdown, when it was just an ordinary recession, there was a theory that the big emerging markets (BRIC: Brazil, Russia, India, China) were "decoupled" from the US economy(& other developed economies). Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. But in reality, Economies have become more intertwined through trade and finance, which should make business cycles more synchronized. The slide in emerging stock markets (in 2008) on Wall Street's fall seems to support this view. These people on the blue channel suddenly have, forgotten about Decoupling and are seldom find giving the statement that::

“When America catches cold( & not swine flu), rest of the World starts sneezing”.

Have these white collared people forgotten their statements made a couple of years back???

Decoupling does not mean that an American recession will have no impact on developing countries. That would mean too impractical. Such countries have become more integrated into the world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). Consumption is gaining more weight in the US economy. For example, it contributes about 72 percent to the GDP of China. The complex web of financial transactions, makes the global economy tightly coupled. The “decoupling” argument became the latest big idea to shrink dramatically when tested in the real world (provided if we leave out Chile which still reported a GDP of 8%+ in FY2008). Decoupling was all the rage early last year when international financial markets all but ignored the increasing turmoil in the U.S. economy and stock market. However, some advocates of this theory still believe that the basis of comparison they selected got them into trouble. U.S. economies that were showing wear and tear then were those to which the rest of the world would never be heavily exposed. The U.S. slowdown was driven almost entirely by housing, it made sense that the rest of the world kept right on going. Housing is a domestic story which was strangely linked to the entire world.

The rise in risk aversion is global and will have an impact on credit terms and availability everywhere. And we're finally seeing evidence that the U.S. job market is losing steam and consumer spending is slowing. It was only through economic liberalization (LPG 1991-92) that the economies of Asia were able to grow as fast as they have, allowing for the development of conspicuously consuming middle classes. This resulted in opening up of economies ( i.e. trade, finance etc) and therefore rise of inter-dependence.

The new Asian consumers may not be able to compensate for all of the exports that would be lost during an American recession( the textile sector which depended heavily on exports is already facing problems and their voices for an exclusive severance package keeps on rising with time).

The irony is that these economies are more coupled with the rest of the world than they ever were in the past.