Decoupling on the part of the under-developed economies is defined as
accelerating along the path of eliminating inordinate reliance upon the US and
other developed economies as export markets. Decoupling would also tend to
undermine reliance upon the dollar and boost the role of regional currencies in
trade, finance and in forex reserves composition.
Decoupling would be accomplished fundamentally by boosting domestic demand and
by increasing trade amongst the emerging
economies to replace the strategic loss of trade volumes with the developed
economies.
Skeptics of the decoupling concept are generally of the same mind as those who
still cannot get past the outdated conventional wisdom addressed earlier in
this article, the unfounded notion that the global order at present revolves
almost exclusively around the US and the dollar and will continue to do so for
the foreseeable future.
True, the concept of decoupling experienced a serious blow to its credibility
when the present global crisis proved that China and the other under-developed
economies still relied upon the US and the rest of the developed economies for
a very large portion of their export fortunes. However, at most this proved the
under-developed economies had not yet achieved decoupling, but it did not in
any way prove they could not do so going forward. As we shall see, this global
crisis, centered in and focused extraordinarily upon the US and the other
developed economies of the world, is providing powerful impetus, urgency and
grand opportunity for the emerging economies to finally achieve decoupling.
The impetus and the urgency to finally achieve decoupling derive from the
growing recognition, throughout the under-developed world and beyond, of the
fact that the world's traditional driver of demand and economic growth (the US
and the developed economies) has extraordinarily been lost. Even US Treasury
Secretary Timothy Geithner acknowledged this fact in his speech during the
recent visit to China. He stated:
In the United States, saving rates
will have to increase, and the purchases of US consumers cannot be as dominant
a driver of growth as they have been in the past.
In China, as your leadership has recognized, sustainable growth will require a
substantial shift from external to domestic demand, from investment and export
driven growth, to growth led by consumption. Strengthening domestic demand will
also strengthen China's ability to weather fluctuations in global supply and
demand.
Globally, recovery will have come more from a shift by high saving economies to
stronger domestic demand and less from the American consumer.
The
world at large increasingly recognizes that the "conspicuous consumption" of
the US consumer is dead. The drunken party is over and the colossal hangover
has arrived. Earlier in this article we examined the increasingly grim outlook
for government finances in the developed economies, and the equally grim
outlook for a return to vibrant economic growth anytime soon. The leaders of
the under-developed nations now fully recognize that any return of the
traditional global driver of demand and growth is extremely unlikely, and that
their fortunes now lie much more in spurring domestic demand and in
strategically boosting trade amongst themselves - in other words, decoupling.
Both mechanisms - spurring domestic demand and boosting trade outside the
developed world - are already achieving largely unforeseen but quite
respectable advancement down the path of decoupling. How so?
In the case of China, many assumptions made in the West with respect to the
export-dependency of its gross domestic product (GDP) have been exposed as
being faulty all along. In fact, exports accounted for significantly less of
China's GDP than was assumed in the West. That means it wasn't nearly as
dependent upon trade as the experts thought. That in turn means that its
dependence upon the US and the other developed economies of the world was
considerably less than assumed. Finally, these things mean that the task of
achieving decoupling isn't surmountable after all. What are these facts
regarding China's level of reliance upon exports?
According to multiple sources (see the references at the end of this article),
China possessed an underlying domestic demand component of considerable potency
that most experts in the West either missed entirely or excessively discounted.
This component of domestic demand can be throttled at will, and it was
throttled back by China's leaders during the boom years so as to avoid
over-heating of the economy.
When the present crisis caused export levels to collapse, China's leaders
quickly throttled the domestic demand component forward, and China's economy
avoided the collapse of GDP suffered by most of the rest of the under-developed
export-based economies. Its GDP growth tumbled from 13% in 2007 and nearly 10%
in 2008 before the crisis really began to bite, to 6.1% in the first quarter of
2009. While that is a significant fall, it isn't anywhere near a recession.
China is widely forecast to accelerate its growth later this year to as much as
8%.
China possesses so much unmet domestic demand that it has been able to quickly
turn industrial production inward. The savings rate of the average Chinese
consumer is very high. Now that industrial production is turning inward it can
benefit from the huge potential of that enormous pool of wealth. In addition,
China's leaders have begun to remove the monetary/financial constraints they
placed on domestic lending, thus helping to throttle forward the domestic
demand component. Additionally, its domestic stimulus package is very
effectively accomplishing the same thing. During the export-led boom years
China was building a large middle class. Now that large middle class is serving
China's decoupling efforts very well by fueling domestic demand.
There are risks, of course. China's leaders have directed the banks to keep
strict credit guidelines in place so as to keep the bad-loan rate at acceptable
levels. The leaders already have a good track record of preventing asset
bubbles from getting out of control. The negative example of the US here serves
as a potent incentive for China's leaders to stay vigilant and to act with
courage to prevent asset bubbles and bank failures.
As China continues to emerge as the key driver of demand and growth, leading
the under-developed economies out of this recession first, against the backdrop
of the inability of the developed economies to do so, then trade amongst the
under-developed economies, trade that significantly revolves around China as
the key driver, will surge.
Since the demographics and other key factors amongst the under-developed
economies of the world strongly favor a more rapid implementation of the
domestic demand component than predicted by Western experts, then this world
sector is very likely to emerge stronger than predicted from this crisis, and
be increasingly attractive to global investors, against the backdrop of the
ever-more deeply troubled dollar and US government bonds. Inflows into the
emerging markets are already quickening, providing crucial financing and
capitalization required for consolidation of the domestic demand component and
for bolstering trade amongst the members of this world sector.
What we have in the under-developed economies then, overall, is an excellent
formula for achieving a very respectable measure of decoupling over the next
very few years. Once again, the experts
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