The idea that emerging markets could grow independently from the west was popular in 2007. However, shocks to the financial system in September 2008 sent emerging equity markets tumbling and demand contracted savagely. The recent equity market rallies in emerging markets have once more breathed life into the ‘Decoupling’ theory.
What is ‘Decoupling’?
The theory of ‘Decoupling’ proposes that economic growth in emerging markets becomes less correlated with developed markets. This concept has received its fair share of criticism due to the emerging market nations’ plunge in production levels and declining growth forecasts in line with the rest of the world. China experienced an 18% fall in exports in January 2009 suggesting, in the short term at least, that emerging equity markets haven’t decoupled as they are still sensitive to demand of the developed world.
Can emerging market growth decouple?
With young populations and a growing middle class, emerging markets have the potential to make the transition from export-led to domestic driven growth with the assistance of their respective governments. Recently, China has seen a revival as the government instigated a 4 trillion yuan ($586 billion) stimulus plan to boost domestic growth. In addition, fixed investment is growing at its fastest pace since 2006 and a huge increase in bank lending is supporting the domestic economy. The other large emerging markets have also taken action to boost domestic demand, as governments now realise that their economies must be less dependent on western consumers in future if their economies are to continue to grow.
Who are the winners and losers?
Despite the reversal of fortune in certain emerging markets, predicting a similar revival for the other emerging nations would be a mistake. Whereas China, Brazil and India have witnessed a revival in production output, nations in eastern and central Europe are far from being out of the woods as many of them relied too heavily on external debt. Hungary, Latvia and Ukraine have all been forced to turn to the International Monetary Fund (IMF) for financial support. This divergence in emerging market nations’ growth prospects has led some observers to suggest that the larger emerging market nations (excluding Russia) have begun to decouple from their smaller peers. One explanation for the superior performance of these nations is that they depend less on exports than many emerging markets do. In Brazil and India, exports account for less than 15% of GDP whereas export oriented nations such as Taiwan (where it accounts for around 64% of GDP) have been far more vulnerable to the downturn in the world economy.
Conclusion
Historically, the US consumer accounted for around 20% of global GDP, but it is unlikely they will be the driving force for growth that they once were. If the emerging market economies are to decouple from the west they need to re-orientate growth to be more domestically focused.
In some of the emerging markets like China infrastructure development is well underway to stimulate future growth. Countries such as India are also taking steps to stimulate their domestic economies after a difficult 2008. However, for some emerging markets, which are dependent on foreign funding or are very sensitive to western consumer demand, the outlook is more mixed.
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