Wednesday, October 20, 2010

The Decoupling Theory

One term that has been doing the round nowadays on the web, on biz news channels or newspapers is “Decoupling”. The decoupling theory holds that Emerging economies have broadened and deepened to the point that they no longer depend on the United States or Europe for growth. Emerging markets (EMs) are nations with social or business activity in the process of rapid growth and industrialization. So let’s start our exploration of the decoupling theory (DT) now.

Decoupling as we all know is separating or detaching. But what’s the reason that we hear so much about DT? The two likely reasons are shaky recovery of the developed economies with V shaped likely to make way for a U or even worse W shaped recovery and the robust performances of the emerging economies like China & India.  So what does DT entail for the world economy? One, it signifies the growing strength of the developing countries as well as weaning strength of the countries like US & UK. Add to that it also tells that emerging countries are gaining self sufficiency i.e. consuming what they are producing within themselves.

So let’s us now look at some of the signs that make DT a reality:
·           Statistics show that Asia excluding Japan had sent 62 per cent of its exports to countries outside the Group of 3(the United States, the European Union and Japan) in 2010 so far, up from 54 per cent in 2003. Imports tell the same story. Over the same period, Asian imports from countries outside the Group of 3 rose to 68 percent of the region’s total, from 60 per cent.
·           Ten years ago rich countries contributed around two-thirds of global GDP after allowing for differences in purchasing power now they contribute just over half.
·           In 2002-08 more than 85% of developing economies grew faster than America’s. In fact an IMF study puts the rate of growth of emerging markets at 6.6% whereas developed ones may limp along at 2.2%.
·           Reports indicate that major part of the recovery in the developed economy has been due to the cost cutting measures rather than the top line growth. This is also an indication that level of investment is coming down progressively.
·           The demography is for everybody to see, an aging population has resulted in pensioners outstripping the wage earners in the US or the developed Europe.

But some interesting observations that negate DT do come through:
·           Emerging markets go beyond the likes of China, India or Brazil. So when we consider decoupling, we should consider the capabilities of other nations especially the smaller ones as well.
·           Another point that begs attention is the capability of emerging economies to take leadership roles in the global economy. The Yuan devaluation issue has not gone down well with most nations.
·           Even the political leadership, the transparency and efficiency of the EMs will have to be considered when we take a call on decoupling.
·           With most EMs focussing on export led growth, they will look towards the developed economies i.e. beyond EMs as markets for their products. After all nobody wants to run a deficit for too long. EMs will benefit handsomely from any rebound in spending by the developed markets.
·           It might sound a bit clichéd but in an increasingly globalised economy decoupling seems unlikely if not improbable.

So my observation would be that DT would remain more of a theoretical concept. Rather what we should anticipate in near future is increased role and contribution of the EMs in global economy.
Looking forward to hear from you all.

1 comment:

  1. A nice read on EMs: