Emerging economies have not become ‘decoupled’

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Your country of residence is where you buy your clothes, eat your meals, draw up your accounts and write your board minutes. But the volume and value of all these domestic operations depends on the role the country’s producers play in the global economy.

Ali Baba has always been associated with the 40 thieves. But Ali has decoupled from the robbers: a Google search for “Alibaba” will take you to a Chinese e-commerce platform. The company’s recent initial public offering has made it one of the most valuable internet businesses.

“Decoupling” is the investment theme of the moment. The claim is that the economic performance of the emerging economies of Brazil, Russia, India and China, and of Asia generally, is now largely disconnected from that of developed economies. Statistically, China now accounts for a substantial proportion of total world economic growth and most of that growth results from increased demand for goods and services within China itself. Trade among Asian economies is expanding more rapidly than trade between these economies and the rest of the world. As a result, the setbacks to growth expected in America and perhaps Europe will have little impact on emerging markets.

It does not seem long since the opposite argument was in vogue and globalisation was the big new investment idea. Since companies organised their activities on a worldwide basis, and stock markets around the globe were increasingly correlated with each other, investors should buy industries, not countries.

If we are forced to choose between the metaphor of decoupling and the metaphor that the world is flat, the flat earth theory wins every time. The collapse of communism and economic reforms in China and India have brought about the integration of large sectors of economic activity that were once largely divorced from the global market economy. This is the most important, and beneficial, economic change of our time.

Even in small, open, prosperous economies such as those of Switzerland and the Netherlands, most economic activity takes place domestically. Your country of residence is where you buy your clothes, eat your meals, draw up your accounts and write your board minutes. But the volume and value of all these domestic operations depends on the role the country’s producers play in the global economy. So it is for the increasingly complex economies of the developing world. The scale of domestic and intra-regional trade should not blind us to the dependence of both on what is happening elsewhere. A surgeon may observe the complexity of what goes on in the brain or the heart but cannot forget that both function because of what they take from, and give to, the rest of the body.

The troubling reality is that the coupling of most emerging markets to the global marketplace has not yet gone this far. These small European economies are completely integrated within their own national boundaries and into the international economy. But this is far from the experience of Brazil and Russia, India and China. All occupy huge land areas at disparate stages of economic development. The most affluent and fastest-growing areas of China are mostly the closest to the sea, and you need drive only a short distance from Beijing and Shanghai to experience a different world. Most of rural India is almost untouched by the development that has transformed a few big centres. The streets of Moscow may be crowded with Mercedes, but the provinces of Russia are not.

The investment theory of decoupling is mistaken: a financial crisis, or recession, in western economies will, as usual, have an important effect on companies in emerging markets. Yet there is a deeper sense in which the decoupling thesis is true. The growth of countries such as China and India is the result of changes that occurred there. Western countries did not (except by example) create the momentum for growth in these economies. Nor, except temporarily, can western countries block their gradual transition into the developed world. Countries are masters of their own destiny because they are masters of their own economic, political and social institutions. The poor are not poor because we are rich, although they may be poorer if we are poorer. Reducing global poverty is not about a fairer distribution of finite resources. It is about the ability of every country to make effective use of its principal resource: its human talent.

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