More on the “Decoupling” Theory

The previous two posts (here and here) have argued that the “decoupling” theory, when it comes to emerging markets (like India and China), is a myth. Here is some additional analysis in an article in the Economist:

“INVESTORS were until recently big fans of the “decoupling” theory, the notion that Asian economies can shrug off an American recession. This week’s plunge in share prices, at one point taking the MSCI Emerging Asia Index down 25% from its October high, suggests they have changed their minds. But the fact that their stockmarkets are still coupled does not mean that their economies will follow America over a cliff.

Decoupling was always a misnomer if it implied that an American recession would have no impact in the East. Exports and hence profits would certainly be squeezed; some fear Japan may even be tipping back into recession (see article). Instead, the real argument in the rest of Asia was that it would suffer less than in previous American downturns.”

The article also ends with a caution that the argument against decoupling may have been overplayed to an extent:

“Slowing exports will affect domestic spending. But macroeconomic fundamentals are much healthier in East Asia these days. Large foreign-exchange reserves make countries less vulnerable to shocks. Budgets are in surplus or close to balance, providing more scope for fiscal stimulus to support growth.

For all these reasons, even if Asia’s exports clearly have not decoupled from America, its economies will be less hurt by a recession there than in the past. Standard Chartered forecasts that emerging Asia will grow by an average of 6.4% in 2008, down from 7.8% in 2007. In 2001 growth dropped by three percentage points, to 4.2%. Financial markets were slow to realise that growth and hence profits in some countries in emerging Asia will be dented by an American downturn. But now they risk exaggerating the potential damage.”

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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