The “Decoupling” Debate
20/12/2013
- Opinión
The theory that major developing countries have “decoupled” their economies from those of advanced economies had been promoted by establishment institutions like the IMF. However this theory has been shown to be wrong by recent events.
Developing countries experienced exceptional GDP growth before the outbreak of the crisis, averaging at an unprecedented 7.5 per cent per annum during 2000-08 while growth in advanced economies (AEs) remained relatively weak. This was widely interpreted as decoupling of the South from the North, including by the IMF. Presumably, decoupling in this sense does not imply that the South has become economically independent of the North - something that would be far-fetched given closer global integration of developing countries (DCs). Rather, it should mean increased ability of DCs to sustain growth independent of cyclical positions of AEs by pursuing appropriate domestic policies and adjusting them to neutralize any shocks from the North.
Decoupling was discussed in Akyüz (2012). As shown by several authors cited in that paper, business cycles understood as deviations from trend or potential output continue to be highly correlated. Regarding a more fundamental question of whether there was an upward shift in the trend (potential) growth of DCs relative to AEs, it was concluded that the pre-crisis acceleration of growth in DCs was due not so much to improvements in their underlying fundamentals as to exceptionally favourable but unsustainable global economic conditions including a surge in their exports to AEs, booms in capital flows, remittances and commodity prices, largely resulting from property and consumption bubbles in the US and Europe, rapid growth of international liquidity and historically low interest rates.
In the early months of the crisis, DCs were again expected to decouple from the difficulties facing AEs. The IMF underestimated not only the depth of the crisis, but also its impact on DCs, maintaining that the dependence of growth in the South on the North had significantly weakened (IMF WEO April 2007 and WEO April 2008). After the collapse of Lehman Brothers in September 2008, the global economic environment deteriorated in all aspects that had previously supported growth in the developing world, resulting in a sharp downturn in several DCs.
However, this was soon followed by rapid recovery, starting in 2009, thanks to a strong countercyclical policy response in DCs, made possible by their improved fiscal and balance-of-payments positions during the earlier expansion. Monetary policy response to the crisis by the US and Europe also helped recovery in DCs by directing capital flows back to them after a sudden stop and sharp reversal triggered by the Lehman collapse.
The combination of the downturn in AEs and strong recovery in the South was once again interpreted as decoupling. However, the initial momentum in DCs could not be maintained. Although since 2009 conditions in global financial and commodity markets have generally remained favourable, the strong upward trend in capital flows and commodity prices has come to an end and exports to AEs have slowed considerably. Furthermore, the one-off effects of countercyclical policies in DCs have started fading and the policy space for further expansionary action has narrowed considerably.
Outside China, fiscal and payments constraints started biting in most major DCs as a result of the shift to domestic-demand-led-growth, leading to fiscal tightening. Consequently, growth in DCs declined in both 2011 and 2012 after a strong recovery in 2010. In Asia, the most dynamic developing region, in 2012 it was some 5 percentage points lower than the rate achieved before the onset of the crisis; in Latin America it was almost half of the pre-crisis rate.
The IMF has now “refined” its position on the question of decoupling, revisiting the issue in IMF WEO (October 2012: chapter 4) under “Resilience in Emerging Market and Developing Economies: Will it last?” In a quantitative analysis, lumping together more than 100 emerging market and developing economies (with per capita incomes ranging from $200 to over $20.000) and examining their evolution over the past 60 years, it has concluded that “[t]hese economies did so well during the past decade that for the first time, [they] spent more time in expansion and had smaller downturns than advanced economies. Their improved performance is explained by both good policies and a lower incidence of external and domestic shocks: better policies account for about three-fifths of their improved performance, and less-frequent shocks account for the rest.” (IMF WEO, October 2012: 129.)
“Good policies” that the IMF has found to have improved performance in DCs include “greater policy space (characterized by low inflation, and favourable fiscal and external positions)” created by “improved policy frameworks (countercyclical policy, inflation targeting and flexible exchange rate regimes).” No robust link could be found between structural factors including trade patterns, financial openness, capital flows and income distribution on the one hand, and the “resilience” of DCs on the other.
The Fund ignores the role of positive external shocks in stimulating growth and creating policy space in DCs, but focuses on the absence of strong adverse shocks. There is ample evidence, cited in Akyüz (2012), that improved performance of commodity-exporting DCs which account for much of the acceleration in the South after 2002 was the result of the twin booms in commodity prices and capital flows which also created space for subsequent counter-cyclical policies in response to fallouts from the global crisis. These positive shocks provide a better explanation of the exceptional performance of many DCs in the past decade than “good” orthodox policies such as inflation targeting, single-digit inflation and flexible exchange rates.
Since 2011 the IMF has been constantly over-projecting growth in emerging and developing economies. The IMF WEO (April 2011) projected 6.5 per cent growth for 2012, revised it downward to 6.1 in September 2011, to 5.7 per cent in April 2012 and 5.3 in October 2012. IMF WEO (April 2013) estimates the growth outcome for these countries at 5.1 per cent, almost 1.5 points below its original projection, and recognizes the possibility that “recent forecast disappointments are symptomatic of deeper, structural problems” (p.19), revising downward the medium-term prospects of these economies (pp. 22-23). Another IMF report estimates the average potential growth rate of DCs in the Western Hemisphere at slightly over 3 per cent, far below what is required for a genuine “rise of the South” and catch-up with AEs, and recognizes that the above-potential growth achieved during 2003-12 is not sustainable without fundamental changes (IMF, 2013).
- Yılmaz Akyüz is the Chief Economist of the South Centre. Contact: akyuz@southcentre.int.
Decoupling was discussed in Akyüz (2012). As shown by several authors cited in that paper, business cycles understood as deviations from trend or potential output continue to be highly correlated. Regarding a more fundamental question of whether there was an upward shift in the trend (potential) growth of DCs relative to AEs, it was concluded that the pre-crisis acceleration of growth in DCs was due not so much to improvements in their underlying fundamentals as to exceptionally favourable but unsustainable global economic conditions including a surge in their exports to AEs, booms in capital flows, remittances and commodity prices, largely resulting from property and consumption bubbles in the US and Europe, rapid growth of international liquidity and historically low interest rates.
In the early months of the crisis, DCs were again expected to decouple from the difficulties facing AEs. The IMF underestimated not only the depth of the crisis, but also its impact on DCs, maintaining that the dependence of growth in the South on the North had significantly weakened (IMF WEO April 2007 and WEO April 2008). After the collapse of Lehman Brothers in September 2008, the global economic environment deteriorated in all aspects that had previously supported growth in the developing world, resulting in a sharp downturn in several DCs.
However, this was soon followed by rapid recovery, starting in 2009, thanks to a strong countercyclical policy response in DCs, made possible by their improved fiscal and balance-of-payments positions during the earlier expansion. Monetary policy response to the crisis by the US and Europe also helped recovery in DCs by directing capital flows back to them after a sudden stop and sharp reversal triggered by the Lehman collapse.
The combination of the downturn in AEs and strong recovery in the South was once again interpreted as decoupling. However, the initial momentum in DCs could not be maintained. Although since 2009 conditions in global financial and commodity markets have generally remained favourable, the strong upward trend in capital flows and commodity prices has come to an end and exports to AEs have slowed considerably. Furthermore, the one-off effects of countercyclical policies in DCs have started fading and the policy space for further expansionary action has narrowed considerably.
Outside China, fiscal and payments constraints started biting in most major DCs as a result of the shift to domestic-demand-led-growth, leading to fiscal tightening. Consequently, growth in DCs declined in both 2011 and 2012 after a strong recovery in 2010. In Asia, the most dynamic developing region, in 2012 it was some 5 percentage points lower than the rate achieved before the onset of the crisis; in Latin America it was almost half of the pre-crisis rate.
The IMF has now “refined” its position on the question of decoupling, revisiting the issue in IMF WEO (October 2012: chapter 4) under “Resilience in Emerging Market and Developing Economies: Will it last?” In a quantitative analysis, lumping together more than 100 emerging market and developing economies (with per capita incomes ranging from $200 to over $20.000) and examining their evolution over the past 60 years, it has concluded that “[t]hese economies did so well during the past decade that for the first time, [they] spent more time in expansion and had smaller downturns than advanced economies. Their improved performance is explained by both good policies and a lower incidence of external and domestic shocks: better policies account for about three-fifths of their improved performance, and less-frequent shocks account for the rest.” (IMF WEO, October 2012: 129.)
“Good policies” that the IMF has found to have improved performance in DCs include “greater policy space (characterized by low inflation, and favourable fiscal and external positions)” created by “improved policy frameworks (countercyclical policy, inflation targeting and flexible exchange rate regimes).” No robust link could be found between structural factors including trade patterns, financial openness, capital flows and income distribution on the one hand, and the “resilience” of DCs on the other.
The Fund ignores the role of positive external shocks in stimulating growth and creating policy space in DCs, but focuses on the absence of strong adverse shocks. There is ample evidence, cited in Akyüz (2012), that improved performance of commodity-exporting DCs which account for much of the acceleration in the South after 2002 was the result of the twin booms in commodity prices and capital flows which also created space for subsequent counter-cyclical policies in response to fallouts from the global crisis. These positive shocks provide a better explanation of the exceptional performance of many DCs in the past decade than “good” orthodox policies such as inflation targeting, single-digit inflation and flexible exchange rates.
Since 2011 the IMF has been constantly over-projecting growth in emerging and developing economies. The IMF WEO (April 2011) projected 6.5 per cent growth for 2012, revised it downward to 6.1 in September 2011, to 5.7 per cent in April 2012 and 5.3 in October 2012. IMF WEO (April 2013) estimates the growth outcome for these countries at 5.1 per cent, almost 1.5 points below its original projection, and recognizes the possibility that “recent forecast disappointments are symptomatic of deeper, structural problems” (p.19), revising downward the medium-term prospects of these economies (pp. 22-23). Another IMF report estimates the average potential growth rate of DCs in the Western Hemisphere at slightly over 3 per cent, far below what is required for a genuine “rise of the South” and catch-up with AEs, and recognizes that the above-potential growth achieved during 2003-12 is not sustainable without fundamental changes (IMF, 2013).
- Yılmaz Akyüz is the Chief Economist of the South Centre. Contact: akyuz@southcentre.int.
The full South Centre's Research Paper No. 48 on Waving or Drowning: Developing Countries After the Financial Crisis is available at www.southcentre.int.
Source: SouthViews No. 94, 18 December 2013
South Centre
https://www.alainet.org/fr/node/81874?language=es
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