I’m still struggling with this one but the global value chains that link country to country have changed (should change) the way we think about globalization.
Last September, the failure of Lehman Brothers sent global stock markets tumbling, causing billions of dollars of losses across the world and severely shaking the foundations of the international banking system. The world’s largest economy is now officially in a recession, consumer demand has slumped, and millions have lost their jobs across the globe. Many emerging Asian economies have been hit much harder than their Western counterparts. For the past few years, emerging markets such as China and India were new engines of global growth. Even when the United States experienced a slowdown in 2007, these economies continued to record high growth rates and large current-account surpluses. Some economists even wondered whether the US and the rest of the global economy were headed in different ways. But the idea that much of the world economy has “decoupled” from the US may be based more on investor strategy than a sound investment theory.
No one will argue that against the fact that the United States is still the dominant power in the global economy even in this current mess. What about China? What impact will this financial crisis have on China’s economic output? I have a sneaking suspicion that the financial crisis will affect China’s economic output in the short run but will help China achieve a stronger relative global position in the long run.
>Will have more meat to back up these claims later. Stay tuned.
Advocates of decoupling argue that European and Asian economies, especially emerging ones, have become robust and diversified enough that they no longer need to depend on American growth, leaving them largely insulated from a severe slowdown in the world’s biggest economy. Over the last two decades, the global economy has changed significantly. Emerging economies have integrated into the global economy and have experienced strong growth. Some, like China and India, have even continuously outpaced developed economies. Countries such as China, Singapore, and the oil-producing states of the Persian Gulf have realized enormous financial surpluses, while the United States has become the world’s largest debtor. This is in stark contrast to the early 1990s when many of the emerging economies ran balance-of-payments deficits as they imported capital to finance their growth.
The US has functioned as the main engine of growth in the global economy for the last several decades. However, financial experts began to question if there was a genuine shift in economic power after a slowdown in the American economy in 2001. Investors on Wall Street noticed that emerging economies such as China and India continued to grow steadily, even when the American economy was stagnating. Michael Avery, chief investment officer of Waddell & Reed, has noted that the concept of decoupling began to “pop into the heads of professional investors, including his, during the last US recession, in 2001-2, although it had not yet achieved buzzword status”. This set in motion the thinking that the US might not be the leading economic force in the future. Many have speculated that China in particular is moving from being export-dependent to enjoying strong internally driven growth due to rising incomes and higher consumer demand. In an industry based on perception, faith in decoupling generated impressive performances for stocks of emerging economies, encouraging greater investment. High returns made it easier for investment bankers and economists to sell their idea of a decoupled world.
Economic trends in 2007 helped support the decoupling argument. A major slump in the US in the first quarter did not pull the reins on growth in Europe or Asia. China, India, Central and Eastern Europe, along with the Middle East purchased larger shares of capital goods and injected capital into European and Japanese economies. While the American economy decelerated, emerging economies were growing at full speed, adding fuel to the decoupling debate. For example, China’s exports to America slowed to 5 percent in 2007-2008, but exports to the other BRIC economies (Brazil, India, and Russia), increased by more than 60 percent and were up 45 percent to oil-exporting economies. As the number of economies that traded with one another grew, some economists began to speculate if the US and the rest of the global economy were going their separate ways. Investors, in particular, stood to gain financially if the decoupling theory were to be true.
The Chinese government is undeterred. They even announced recently that they will grow at 8% in 2009. However, it’s difficult to know what kinds of “statistics” the Chinese economists have based this prediction on – especially since they have been advertising the fact that GDP needs to grow at 8% a year to continue their economic advancements.