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Decoupling redux

October 12, 2010

Dani Rodrik ponders the idea that developing countries might again be looking strong enough save the world. After the global economic crisis, hopes for decoupling were:

dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.

But now emerging economies are carrying less debt; governance is improving; technology transfer holds greater opportunities; and poorer  economies are becoming more productive.

Rodrik is sceptical, though. China can’t rely on an undervalued currency forever and emerging countries might not show good enough global economic leadership to drive a global recovery.

The likes of Brazil and India usually argue against global rules — such as on trade and the environment. They aren’t likely to favour new multilateral constraints on their own economies.

If the world economy’s center of gravity shifts substantially toward developing countries, this will not be a smooth – and possibly not even a benign – process.

Rodrik is quite right that a new long-term trend toward a new power balance in the world economy will be messy and difficult, and it might not end well.

But I have long questioned the developing/developed distinction. The birth of the BRICS — Brazil, Russia, India and China — has scotched any notion that the world can be lumped into two camps: the US, Europe and ANZ versus the rest.

Most of the poor countries i’ve visited in the last few years have been on a one-way sufferfest as a result of the crisis. There’s no ambiguity about it. As Rodrik points out, the collapse in international trade hurt all countries, developing and industrialised. But where the BRICS might recover, the poorest couldn’t cope. A downturn in exports can be life-and-death. When European orders stopped coming, Kenyan flower farm workers simply sat idle.

Added to this, foreign investment inflows dwindled. Overseas aid was affected as rich governments rejigged their budgets.

The last place I went — Tuvalu — is still struggling. Remittances from overseas seafarers have hit rock-bottom as ships sit idle. As a result of the financial crisis the government’s prudently-run trust fund hasn’t paid out for two years. Exports were always pitiful but have no chance now. The government will simply run out of money in a year or so unless a donor steps in to plug the gap.

It might be true that the BRICS can save the world. They have big, dynamic economies that are gradually becoming more productive. But for the rest, it’s not so simple. Rather than decoupling it might be more correct to talk of scattering, dispersal or disintegration. There is a large group at the global periphery which won’t rebound for a long time — and for many people, it is already too late.

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