All in this together? On decoupling

In this article, FT’s journalists Guha, Giles, Atkins, and Pillin write:

“Yet some experts still doubt the ability of the big emerging economies to substitute domestic demand for exports.

““We just don’t know how easy it will be for them to pull this off,” says one former policymaker. He worries that China and its peers may either slow more sharply than anticipated or reaccelerate too quickly, igniting inflation at home and in commodity prices, before they are forced to slam on the brakes again, with potentially global consequences.”

At this time, nobody knows for sure whether the rest of the world will follow the U.S. in a painful (and long lasting) recession.   It depends on how the rest of the world plays its hand.  However, as far as China is concerned, the worries of that mysterious ‘policymaker’ may be largely unfounded.  As far as the eye of a Western economist can see, China’s government is not very likely to allow for a substantial deceleration.  My friend Oscar Galindo (and my own reading of China’s experience of the last five years) has persuaded me that the Chinese have problems, but also an ample (political) degrees of freedom to keep growing.  That’s for the time being.  Moreover, the Chinese are all Keynesians nowadays.  Decades of rapid growth (with a host of dislocations, no doubt) have given the government some political capital.  So, I expect them to switch their emphasis from exports to trade diversification, domestic investment, local development, greater social equity, and the environment.

A propos of trade diversification, if Russia, India, and Latin America continue to expand their economic ties, the “decoupling” story that the FT reporters pooh pooh in this article as “naive” may turn out to be spot on.  Journalists present a strawman version of the “decoupling” argument.  On this very idea, I posted a comment on Paul Krugman’s blog:

In case you can’t find my comment, here it is [slightly ammended]:

# 6. August 24th, 2008 12:10 am

Originally, if my memory helps, decoupling didn’t mean that poorer countries (say China or Brazil) would [be] escaping the U.S.’s altogether. It just meant hedging or insuring. This was, I believe, the idea in Ricardo Caballero’s paper at the 2002 AEA meeting in Washington, DC, where he introduced the idea normatively.

So, if I remember correctly, it only meant that the ups and downs of the cycle in the rich countries wouldn’t hurt poorer countries, except to the extent the ups and downs are *systemic*. Obviously, the U.S. is a huge part of “the system.” In that sense, exposure to systemic risk is necessarily exposure to the U.S. There’s no way around that. All those countries could do is lower their betas.

But if the premise is that decoupling requires poorer countries shedding all risk (including systemic risk), then the argument is silly. It’s impossible. Decoupling is refuted by assumption.

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1 Comment

  1. mi nombre es Ana Huato, vi tu apeido y me dio curiosidad de saber de donde es usted o siestamos relacionados. Yo soy de Apatsingan y actualmente vivo en Estados Unidos, el nombre de mi papa es Felipe Huato Penaloza, lo conose?. mi correo es amatiran@hotmail.com

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