After bruising global downturns, the US economy has usually led the world back to growth, but developing countries could be the engine that powers the next recovery.
Despite fears just months ago that they would be among the biggest victims of the financial crisis, emerging giants like China, India and Brazil are set to rebound strongly next year, the Organization for Economic Cooperation and Development (OECD) predicted on Wednesday — as Europe, the US and Japan lag.
“It’s good to have a locomotive out there pulling the train,” OECD secretary-general Angel Gurria said, referring to China, India and Brazil. “But we can’t put the onus on their shoulders — they help, but they can’t get us out of the hole.”
The divergence between the emerging and the developed countries suggests that the once-popular theory of decoupling — the notion that emerging markets could be moving independently of developed economies — may make a comeback.
When the emerging markets were also brought low by the global financial crisis, the theory was abandoned for talk of “recoupling.”
Now, is “re-decoupling” at hand?
Gurria argues that the net result of faster emerging market growth would be “absolutely positive,” but he acknowledges that one early side effect is already evident in the form of surging oil prices, which have risen from US$33 a barrel in February to nearly US$70 now.
“Why is oil doubling when we are in the deepest recession ever?” Gurria asked.
“Decoupling is back as a thesis,” said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. “And we should recognize how different the current situation is from past crises.”
NEARING BOTTOM
Striking a somewhat optimistic note, the OECD said that, thanks to stimulus programs in the US and elsewhere, the downturn appeared to be nearing bottom. It warned, however, that the recovery was likely to be fragile, with unemployment growing and unused production capacity remaining for years.
And increased savings by US corporations and consumers could partly offset the stimulus, tamping down growth in the US and around the world.
Economists have furiously debated whether decoupling was taking place.
It would mean a fundamental shift in the global economy — that traditionally dependent developing economies move according to their own fundamental trends rather than the ups and downs of developed countries. Increasing independence could lead to increasing influence and a relative shift in global economic weight toward the emerging giants, especially China.
The 30 industrialized members of the Paris-based policy and research group account for roughly 60 percent of global economic output.
“I think it’s clear that the situation in emerging economies has changed if you compare it with where we were 15 years ago,” said Jorgen Elmeskov, acting head of the OECD’s economics department.
According to the OECD’s semi-annual report, China could grow 7.7 percent this year and 9.3 percent next year, faster than previous estimates. India could grow 5.9 percent this year and 7.2 percent next year, and Brazil’s economy, after slowing down, will reverse this year and expand 4 percent next year.
The OECD predicted the US economy would shrink by 2.8 percent this year and grow by 0.9 percent next year, a bit better than the flat performance the organization estimated in March.
By contrast, the Japanese economy is expected to shrink 6.8 percent this year, while Europe should contract 4.8 percent, with both regions hit harder than in earlier OECD forecasts.
The decoupling hypothesis has had nearly as many ups and downs as the global economy itself.
As the post-World War II economy recovered and globalization took hold, economists detected a pattern in which a slowdown in the developed world led to an effect that made conditions far worse in poorer countries, Posen said.
But by 2007 and last year, he said, decoupling was gaining currency as the US economy slowed but Brazil, Russia, India and China continued to grow. When those countries hit the wall late last year, it seemed as if the decoupling thesis was also dead.
Now, he said, with China and other emerging countries seemingly leading the way, the idea that countries like China, India and Brazil are going to play a far bigger role in global economic expansion is coming back in vogue.
REALITY
If decoupling were a reality, it could be good for developed countries, as growing wealth in China and India could, in theory, increase demand for goods made in recession-battered countries like Japan, Germany and the US. (China and India might require import-oriented consumer economies for that to happen, which is not currently the case.)
On the negative side of the ledger, emerging market-centered growth could spur higher interest rates in the West and Japan, and push up prices for oil and other commodities when the developed world can least afford it.
Another potential downside of decoupling could be a tsunami of capital from developed markets washing over emerging economies and inflating values, said Simon Johnson, a former chief economist for the IMF and now a professor at the Sloan School of Management at the Massachusetts Institute of Technology.
That boom-and-bust pattern has a long history, he said, including in the 1970s, when petrodollars recycled by US banks created a bubble in Latin America.
Today’s rising crude prices could eventually help revive Russia, another emerging giant that is still ailing, but they could prove to be an especially painful blow for the eurozone economy, which the OECD predicts will continue to shrink for the rest of the year before barely growing in the first half of next year.
Economic performance will be “very patchy in Europe,” Gurria said, with unemployment projected to reach 12.3 percent for the region by the end of next year, compared with 10.1 percent in the US and 5.8 percent in Japan.
In the meantime, the prolonged slowdown on the continent, especially in Germany, is spurring locally based giants like Siemens to look to emerging markets for growth.
Siemens, a diversified manufacturer, already derives about a third of its nearly 80 billion euros (US$111 billion) in revenue from emerging markets — with 9 billion euros coming from Brazil, India and China alone.
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