Return of the 'Decoupling' Myth

by Kindred Winecoff

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.

Comments

[beijingpaddy:]

Lots of truth in this article. Today's situation is more about how the world integrates than dealing with issues of decoupling. National economies no longer run in isolation of each other. We are witnessing the first global economic adjustment since globalization got real legs.

China is using this downtime to spend money building its infrastructure so that when things get more back to normal it will be in better shape to compete. More than what developed countries are doing. China is also preparing for the future by spending their hard earned USD buying commodities. Also smart and also what developed economies should be doing and are not.
Both of these are signs of preparation for a future time and not of any decoupling. This strategy is taken right out of the Chinese traditional playbook for waging war. When in a weaker position, use the time when the enemy is distracted to build your fortresses and stockpile goods. (Actually Mao did the exact same thing during the Sino-Japanese war. He used the cease fire with the Nationalists (KMT) to build his army in preparation for the day he knew would come when the civil war would resume).

Think this one through. If by some odd chance the world has changed and the US, Europe. Japan, etc. never recover and if they do, become totally self-sufficient in manufactured goods, commodities etc., then yes, the Chinese miscalculated and are in deep chou dofu (a form of stinky tofu). But otherwise, as expected, when the world recovers, they will emerge from this crisis stronger than before. What decoupling?

Jun 15 03:22 AM

[jeremiah74:]

there is definitely merit to the whole BRIC's concept, namely that these economies are rapidly gaining weight on the world economy.

but than Mr O'Neil's predictions and themes he likes to throw into the investor community are more about Goldman PR than anything of substance. he is more of a bull-market-for-risky-... cheerleader than someone you can take seriously.

China is - in my view - taking a huge gamble. its investing in infrastructure hoping that the rest of the world will recover by itself, and then China can keep growing through exporting goods. if there is no 'V' recovery, then China will just have mitigated its fall and maybe will have stockpiled some commodities on the cheap and improved infrastructure, but without a recovery in the rest of the world China will not grow

Jun 15 04:16 AM

[Dave Wrixon:]

It is highly likely that the US will seek to resolve its issue by a protracted period of isolationism after the dollar collapse, so talk of resolving issues through intergration seems a bit premature.

Jun 15 05:21 AM

[Dave Wrixon:]

China has recognised that the US consumer it a spent force, and is moving on to the next strategy.

It could well be that much of this was planned in advanced and is just part of a masterplan to achieve economic domination.

The idea that a bunch of under-educated over-indebted consumers in an economy that has seen little capital investment in the means of production for decades is World most sort after resource is frankly absurd.


On Jun 15 04:16 AM jeremiah74 wrote:

> there is definitely merit to the whole BRIC's concept, namely that
> these economies are rapidly gaining weight on the world economy.
>
>
> but than Mr O'Neil's predictions and themes he likes to throw into
> the investor community are more about Goldman PR than anything of
> substance. he is more of a bull-market-for-risky-... cheerleader
> than someone you can take seriously.
>
> China is - in my view - taking a huge gamble. its investing in infrastructure
> hoping that the rest of the world will recover by itself, and then
> China can keep growing through exporting goods. if there is no 'V'
> recovery, then China will just have mitigated its fall and maybe
> will have stockpiled some commodities on the cheap and improved infrastructure,
> but without a recovery in the rest of the world China will not grow

Jun 15 05:26 AM

[Tony Daltorio:]

Just another article that passes on the Wall Street propaganda - that all other nations are export-oriented and depend totally on the US. What hubris! I would suggest actually getting real facts from on the ground in China, Brazil, etc. The facts are much different that the picture that Wall Street is painting.

Jun 15 09:16 AM

[Alphameister:]

So many straw men to be torched! De-coupling has never been an all-or-nothing proposition. China is very wisely reducing dependence on consumers in the US and other parts of the developed world by cultivating trade with other emerging markets such as Brazil while also promoting increased consumption within its own markets. And the trend of the numbers is certainly encouraging. China will never be completely independent of developments in other major economies, but it is doing its best to reduce that dependence.

Jun 15 10:27 AM

[Danny Furman:]

In agreement with many comments above, if earnings or growth mean anything then decoupling is an easy thing to do. The volatility is inherited because much of the capital infused into emerging economies comes from developed ones, who foolishly sell stocks with good fundamentals on market down days because companies are distant and less transparent. Today is/was a great day to buy emerging markets, but only those with already reported growth in 2009. These markets have proven to swing up as fast or faster as they do down, unlike some others...

Jun 15 03:38 PM

[JLarkin:]

I don't know how successful China's strategy will be of, let's say, moving toward decoupling or less dependence on exports. The stimulus will work for a while, but based on my limited travels to China where I saw numerous abandoned construction projects (roads, buildings, etc.), you have to wonder how many bridges to nowhere are now being built in China.

The US consumer is down, but not necessarily out. Savings are being replenished, and demand is certainly pent-up. At some point, maybe when the layoffs level out, consumers are going to start buying again, buying all those things they promised themselves during the lean period.

Jun 15 07:28 PM