In these healthier, but economically troubled times, the word decoupling has come to symbolize a hope among economists and investors that developing countries, especially the emerging giants of China and India, will not be hurt by the credit crunch or the American recession and will provide an alternative source of growth to support the world.
Actually, if Chinese and Indian growth is to support the world, we need them to be coupled, not decoupled. The good news is that they do remain quite coupled and that they are indeed likely to provide some support — as the IMF said in its otherwise gloomy global forecast on April 9. But they have problems of their own, chiefly with inflation, the solution to which could end up hurting other poor countries.
During the American and European recessions of the 1980s and early 1990s, poor countries suffered because they depended on exports to the West and on borrowing huge sums from Western banks. Their exports slumped and the bankers turned tail, bringing about the Latin American debt crisis of the 1980s, the burden of private and official debts in Africa, and the broad emerging-markets crisis that began in Asia in 1997.
In the decade since 1997, the economic world has changed dramatically. Asian countries in particular, but also many Latin American ones, all of the Arab Gulf and a few in Africa, have been transformed from capital importers to vast capital exporters. They are no longer dependent on foreign banks. Indeed Chinese, Singaporean and Arab sovereign wealth funds are busy rescuing those very foreign banks.
Asian and Arab capital should, in fact, partly be blamed for the Western financial-market excesses that everyone is now lamenting. Many have blamed the Federal Reserve for allowing credit to expand too easily and both the Fed and other regulators for failing to supervise what was happening. But the main reason why the credit boom happened is that long-term borrowing costs stayed amazingly low — and the chief reason for that was the flood of Asian and Arab capital, being spent on US securities to try to support the dollar and prevent their own currencies from rising.
Nevertheless, despite America’s huge trade deficit and China’s vast surplus, most poor countries are much less dependent than before on exporting to the now-less-great American consumer. China exports more to the European Union than to the US.
The continued growth of China and India is being financed by Chinese and Indian savings. The vast amounts of investment in those countries that is going into new roads, buildings, ports, airports and factories can therefore carry on regardless of what happens in America .
That, however, is where the gilt starts to come off this piece of globalized gingerbread. The upside of globalization is that trade between poorer countries is now increasingly important, as is the capital flowing between them, which will support global growth.
China’s inflation rate rose to 8.7 percent in the year to February, the highest rate for a decade. India’s hit a three-year high of 7 percent in the year to March. Inflation has also gone above 8 percent in Indonesia, Chile, Argentina, Pakistan, South Africa, Turkey and many other developing countries. Rising food and energy prices are the immediate reason, and those are politically explosive in all countries but especially China. The recent Tibetan rioters may have had religion and autonomy in mind, but they were also stirred by resentment over inequality and inflation, both of which are thought to benefit Chinese settlers and harm Tibetans.
The underlying reason for this upsurge in inflation is the same as the sainted (and demonized) Milton Friedman always said it was: Too much money chasing too few goods. Asian and Arab capital surpluses are the money, and although they are being used to invest in new mines, oil fields and the like to produce more materials, the process is slow. And meanwhile two other global concerns are driving up food prices: The rush to use biofuels in place of petrol; and the resistance to genetically-modified crops that is preventing agricultural yields from rising, in the poor world and the rich, and is thus destroying our chances of a repeat of the “green revolution” of the 1960s.
Soon, probably after the Beijing Olympics, China will have to crack down hard on inflation. Other developing countries will have to follow suit. The result will be slower growth in the poor world and quite possibly a slump in commodity prices. For once, however, America will not be to blame.
