Last year, as U.S. and Western European economies stagnated, the developing world surged. Some economists declared a new world order characterized by "decoupled" markets (Economist). Global economies no longer relied on U.S. markets for sustenance and growth, they said, and would rise and fall independently of U.S. growth. Now, amidst the major crisis of confidence (FT) that has seized the U.S. financial system, that theory meets its first major test. The early results, experts say, reveal a mix of outcomes that neither validates nor disproves the decoupling theory, but perhaps tempers it.
Certainly, the world's stock markets are susceptible to contagion. From Western Europe to East Asia, major markets suffered losses as the Dow Jones Industrial Average and other U.S. indices sagged this September. Indices in large emerging markets have been hit particularly hard--Russia's main index, for instance, has lost more than half its value since May, and Chinese, Brazilian, and Indian stocks have also suffered steep losses. In a recent interview with CFR.org, Al Breach, a financial analyst and former managing director for UBS, says emerging markets that experienced a major run-up in share prices are now witnessing a "flight to quality."
Looking beyond stock prices, Europe's financial institutions have suffered alongside their U.S. counterparts--the most recent high-profile blowup being the collapse and nationalization (Telegraph) of the British mortgage lender Bradford & Bingley. As these financial concerns have metastasized, several measures of European business confidence have fallen (Economist). EU officials have been left scrambling for a regulatory fix (Deutsche-Welle), much like the United States itself. The chief economist of one German bank lamented: "Germany can't decouple."
The U.S. crisis is wreaking havoc in other ways as well. Major oil producers, which saw their national coffers bulge as oil prices skyrocketed over the past twelve months, now face the opposite problem. Oil prices have plummeted since early summer, falling from highs of over $147 per barrel to lows just over $90 in mid-September. Some experts credit the decline to fears of falling global oil demand (MSNBC), given the economic pinch created by the U.S. downturn. Others say the decline has been caused more directly by financial institutions, which invested heavily in commodities over the past couple of years and now in many cases have had to unwind those positions (WashPost) due to tight credit.
Despite the seeming global nature of the current crisis, however, the decoupling debate remains far from settled. Apart from the recent stock market turmoil in China, India, and Brazil, those countries still show strong overall economic growth--though bubbling inflation and fears that rising food prices or political unrest could undermine this growth remain as concerns. Some Middle Eastern countries are seeking to use the opportunity (al-Ahram) of U.S. financial problems to push their own plans of establishing regional financial hubs. To an extent, this shift was already under way, but the present turmoil has helped accelerate it, and the trend certainly suggests that some world economies are in the process of decoupling.
In some ways, the question of whether developing economies ever fully "decouple" is semantics. Speaking at CFR in January, Paul Calello, the CEO of investment banking at Credit Suisse, said he thought the term is "overused," and some economists have argued it vastly oversimplifies a complex situation and should be abandoned altogether. The Economist piece quoted above, which argued in March 2008 that a process of decoupling was under way, noted that a severe U.S. economic downturn would undeniably have a "nasty impact on the developing world." Still, it expressed hope that developing countries would be able to use their own monetary and fiscal policies to cushion this blow, if and when it happened. Now, with U.S. markets in turmoil, their ability to do this is being tested.