Decoupling of Emerging Markets: Is it Reality or Myth?

Decoupling of Emerging Markets: Is it Reality or Myth?
August, 2011

Author: Faheem Akram Date written (MM/DD/YY): 24/08/11

© Faheem Akram

the term „Decoupling‟ has been quite popular on the web along with „globalization‟. In spite of decreasing demand in the U. In order to understand decoupling.S. economy.. The facts speak otherwise. Europe and Japan in 2010 so far. up from 54% in 2003. Now we all know what globalization is. In the last three decades the U. have stumbled but those to other emerging nations have surged.S.Decoupling of Emerging Markets: Is it Reality or Myth? For the past few years. For example China‟s growth in exports to the U. but let‟s understand what the term Decoupling is. in this era of Globalization?” Economies today are more convergent towards each other.S. exports to the U. commodities prices are still high because of strong demand and consumption in emerging markets that also shows a sign of self-sufficiency. Brazil and Russia were up by 60% and those to oil exporters by 45%. Asian countries had sent 62% of their exports to countries other than U. It focuses upon whether or not emerging markets are tough enough to protect themselves from effects of recessions in the developed countries in an era of globalization where we talk about “The World is flat”.S. This indicates 1/2 of china‟s exports now go to other emerging markets. But what‟s the reason that has made „Decoupling‟ the buzzword? The most important reason is shaky recovery of developed nations with “V” shaped likely to change into “U” or even worse “W” shaped recovery and robust recovery of the emerging markets like India & China.S. considering this as a problem local to US and European economies. we need to explore how emerging markets have grown in the previous decade with respect to the U. If we talk about exports between the U. and emerging nations.S. and then we shall discuss the hype that surrounds Decoupling of the Emerging Economies. Those in favour of the decoupling theory believe that the Asian economies (that form the major chunk of Emerging Markets) can survive the hits of recession and slowdown in the US economy. Decoupling. Emerging markets share in the world‟s growth has increased significantly. as has been defined in the traditional sense. It also indicates that emerging markets are achieving self-sustainability. and are not only dependent on each other but one can easily say they are more entangled into each other through growing trade and finance between them.A. has grown slowly (2-3%) and the emerging markets have seen a high growth rate (7-9%). but exports to India.S. With the present economic condition where the large developed economies have taken a downturn on their path of growth.. Some signs that make Decoupling Theory a reality:  Other than Japan. Decoupling theory indicates the growing strength of the emerging markets along with weaning strength of the developed countries. Second sign of decoupling can be seen in the commodities prices.S. slowed to only 5% in 2008. means the ability of emerging countries to grow without any stimulus from developed countries. Earlier commodities prices were linked to the demand in the U. BRICs accounted for two-third of world‟s GDP growth. Let‟s analyse Financial and Business decoupling separately. Here one may ask. Imports also © Faheem Akram . primarily the US. “Won‟t Decoupling be a foolish idea to think about. the concept of decoupling becomes quite relevant.

S. an estimate of the dollars‟ worth relative to a collection of other world currencies. from overseas. This indicates emerging nations have decoupled from developed nations and are self-sufficient.S.S. Another fact supporting the idea of Decoupling and Globalization co-existing together is that the spending power of the consumers in the developing economies has increased dramatically. India (52. This also indicates that level of investment has come down progressively. proving it to be a myth. from 60%. The domestic demand in emerging economies has grown by almost four times.2% decline). economy is also doing good but capital inflows tended to reduce during global slowdown as investors shunned risky assets and invest in “Safe Haven”. Now let‟s talk about financial decoupling. The emerging markets now not only trade with richer markets but they have extensively grown their trades among themselves.4% decline).5% in 2008. It also indicates that the developed economies have now lesser impact on the growth of the emerging economies. Dollar was seen as a safe currency to invest.    All the above facts are also in alignment with a study done by IMF.2%.Decoupling of Emerging Markets: Is it Reality or Myth? convey the same story. Money started flowing into the U. Asian imports from countries other than the above mentioned countries rose to 68% of the region‟s total. rallied from low 70s in mid-2008 to a high of 89 in mid-2009. now they contribute over half of the global GDP. making these economies more self-sufficient.39% decline) didn‟t escape the punishment. For example rest of the emerging markets have increases their exports to each other which surmounts to 50% of their total exports. The U. During the period 2002-08 almost 85% of emerging economies grew faster than U. While the S&P 500 index crashed 38.6% whereas developed ones limped along at 2. According to an IMF study the rate of growth of emerging economies was 6. dollar index.76% points increase during 1960-1985 while only 0. FIIs take interest in emerging markets as long as the U. to emerging markets But with the slowdown in the US and European markets damaging the emerging markets. During the same period. The major reason of recovery in the developed markets has been due to the cost cutting measures rather than focusing on top line growth.34% points increase during 1986-2007 in the growth rate of the emerging economies. According to this study 1% point increase in the growth of developed nations corresponds to 0.  10 years back developed economies contributed around 2/3 rd of global GDP after allowing for differences in purchasing power. Few years back we saw how the sub-prime crisis caused immense trouble in the stock markets right from the U.45% decline) and China (65.S. Even the strongest emerging markets like: Brazil (41. the decoupling theory seemed to be on a losing ground. During the crisis Dollar-denominated assets were purchased by investors in “Flight to safety”. © Faheem Akram .S. Russia (72. 30 odd countries witnessed drops of 50% or more.

Maybe it is not dead after all: By Chip Krakoff (Emerging Markets Outlook) Facts are taken from this blog : http://iimc-finclub. We can‟t say decoupling is complete but may term it as an on-going process. We are living in a “Partially decoupled World”. It might sound a bit clichéd but in an ever growing globalised economy.com/finblog/the-decouplingtheory/ © Faheem Akram . PhD. the old saying “When the U. alarming increase in population in these developing nations is also a major concern for rise in commodities prices and selfdependency.The decoupling debate: From “The Economist” (Hong Kong print edition) Decoupling . there have been doubts over China‟s real estate bubble. There are issues like inflation and infrastructure affecting Indian economy although its growth is not entirely export-dependent. Chinese economy is largely export-driven and. decoupling seems unlikely if not improbable. Also. The emerging markets are still challenged with problems of poverty. political instability. India recently recorded an inflation rate of 9. corruption. Also.S. the rest of the world catches a cold” still remains relevant but limited in magnitude.Decoupling of Emerging Markets: Is it Reality or Myth? This Indicates the “Financial decoupling” is not as strong as the “Business decoupling” between emerging markets and the developed nations. With 37% population still below poverty line in India. Saima Rizvi MBA. the growth in emerging markets has been slow compared to the recent past when the growth was robust. it is far from being ready to decouple itself from developed nations.44% (as of June 2011) which was above its growth target of 9%.A Myth: By Dr. sneezes. Since the beginning of 2011. depends on steady demand from developed countries. therefore. Lecturer (Finance) Amity Business School Emerging markets . References:     Emerging Markets Decoupling Theory . Thus.