The Decoupling Debate

The D word - ‘decoupling’ - is at the heart of the debate regarding global economic prospects for 2008 and beyond.

The term refers to the shift by developing economies - and newly industrialising countries in particular - away from dependence on strong demand in the West for their products.

As the USA and Europe face serious dips in demand, to what extent can economies such as Brazil, Russia, India and China find new markets to export to?

An article in The Economist looks at this issue in detail.

NICs have enjoyed strong export-led growth in recent years, meeting apparently insatiable demand in the West with cheap DVD players, cars and raw materials. The trade surpluses of economies such as China and Brazil can be seen as a form of delayed gratification - goods and services are sold to foreigners rather than being consumed domestically. But if foreign demand dips, won’t this seriously harm growth rates in these economies?

Decoupling does not mean that an American recession will have no impact on developing countries. That would be daft. 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). Sales to America will obviously weaken. The point is that their GDP-growth rates will slow by much less than in previous American downturns. Most enjoyed strong growth during the fourth quarter of last year, and some speeded up, even as America’s economy ground to a virtual halt and its non-oil imports fell.

The Economist draws on some recent statistics regarding export dependence in each of the BRIC economies:

The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. Over 95% of China’s growth of 11.2% in the year to the fourth quarter came from domestic demand. China’s growth is widely expected to slow this year—it needs to, since even Wen Jiabao, the prime minister, warned this week of overheating—but to a still boisterous 9-10%.

The benefits of the reserves of foreign currencies built up during years of current account surplus may yet to be fully appreciated:

A severe recession in America could still have a nasty impact on the developing world if commodity prices collapsed and if it caused stockmarkets to fall more steeply, depressing global consumer and business confidence. A sharper fall in the dollar could also further squeeze emerging economies’ exports.

But for perhaps the first time ever, developing countries would be able to make full use of monetary and fiscal policy to cushion their economies. In the past, when they were net foreign borrowers, capital inflows tended to dry up during global downturns as foreign investors shunned risky assets. This forced governments to raise interest rates and tighten fiscal policy. Economies with large external deficits, such as South Africa, Turkey and Hungary, are still vulnerable. But most emerging economies now have a current-account surplus and large foreign reserves; many have a budget surplus or are close to balance, leaving ample room for a fiscal stimulus if necessary.

Of course, the emerging markets represent sales opportunities for not only developing economies, but also for Western businesses struggling with sluggish demand in domestic and traditional markets. Once, Europe and the USA looked east and south for cheap production opportunities.

Perhaps 2008 is the year when they begin to rely increasingly heavily on these emerging economies for more and more of their sales.