Friday 26 June 2009
You can’t have decoupling in an age of globalisation
With Asia showing signs of clawing its way out of the slump ahead of the developed world, there has been a sudden rebound in talk about decoupling: the idea that East Asia can unshackle its economic performance from that of the rich countries and achieve sustainable growth independently.
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You can’t have decoupling in an age of globalisation
Tom Holland
26 June 2009
With Asia showing signs of clawing its way out of the slump ahead of the developed world, there has been a sudden rebound in talk about decoupling: the idea that East Asia can unshackle its economic performance from that of the rich countries and achieve sustainable growth independently.
Analysts at Credit Suisse credit decoupling for driving the impressive rally in Asian stock markets that has seen the Hang Seng Index climb 61.09 per cent since hitting the year’s low on March 9.
Meanwhile, economists at JP Morgan argue it is largely decoupling that is propelling the upturn in Asian trade, which pushed Hong Kong’s monthly exports back above HK$200 billion in May.
Perhaps the talk should really be about re-decoupling, because the idea that Asian economies can escape from their dependence on shipping exports to the rich world is nothing new.
Back in 2007, talk of decoupling was all the rage. The idea was widely touted by brokerage companies eager to promote Asian equity investment to investors nervous about a looming recession in the United States.
In May 2007, for example, investment bank UBS dismissed the notion that Chinese economic growth could be significantly damaged by a slowdown in US demand as “fable”. “China is not an ‘export-led’ economy,” declared one of the bank’s analysts in a note to clients.
Not everyone bought into the idea, however. In March 2007, the South China Morning Post advised readers to “forget decoupling. If the United States slides into recession ... Asia will be hit hard”.
In November, the paper sounded the alarm again, warning that “far from decoupling from the United States, as optimistic analysts like to hope, Hong Kong and the mainland are likely to suffer severely in the event of a US slowdown”.
The reason to doubt the decoupling story should have been obvious. In the aftermath of the Asian crisis, regional governments deliberately directed investment into export industries at the expense of domestic consumer demand. As a result, Asia’s economies became more - not less - closely tied in to the rich world’s business cycle.
Although enthusiasts point to rising levels of intraregional trade as evidence of decoupling, research by Asian Development Bank supports the view that the region’s dependence on exports to developed countries has grown rather than fallen over the past decade.
As the flow chart illustrates, increasing intraregional trade has been driven more by the internationalisation of supply chains than by rising domestic consumer demand, with economies including Taiwan, South Korea, Japan and Singapore all shipping parts to China for final assembly before exporting to the US or Europe.
As a result, although 40 per cent of developing Asia’s exports are shipped to other countries in the region, in reality final demand from regional economies absorbs just 22 per cent of developing Asia’s exports, with the US, Europe and Japan swallowing 78 per cent.
That trade exposure, together with growing financial linkages, has left Asian economies extremely vulnerable to the developed world’s slowdown despite low government debt levels and relatively healthy banking sectors.
That will change only slowly. For now, government stimulus efforts will help regional growth to rebound. But retooling Asian economies for domestic consumer demand-led growth will be a lengthy process lasting years.
It’s been said that Chinese consumers can’t lead the world out of this slump, but that they may just rescue the global economy from the next one.
That’s probably true, but if it is, then so is the reverse. If Chinese consumers can lead the world out of the next downturn, then a shock to domestic demand within China will be equally able to cause it. The linkages will grow stronger than ever. In an age of globalisation, it is not economic dependence that is the fable, but decoupling.
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