Like `globalization' which has hogged the limelight in the recent past, a new concept called `decoupling' has nowadays caught the fancies of the policy makers and investors across the globe. The supporters of the decoupling theory have been advocating the idea that the Asian economies can chug along even in case of a recession in the US economy. They argue that the ongoing downturn in the US economy is indeed a local problem because it is an outcome of the widespread default in the subprime mortgage market. The crux of their argument has been that the US and the rest of the world have now decoupled and so the economic growth path of the US and the rest of the world can diverge sharply. The theory is indeed modern, catchy and invigorating,and has thus unsurprisingly created much hype. But now with the US slowdown spreading across the globe coupled with a declining dollar, advocates of the decoupling theory are debunking their claims.
The crux of their argument has been that the US and the rest of the world have now decoupled and so the economic growth path of the US and the rest of the world can diverge sharply. The theory is indeed modern, catchy and invigorating,and has thus unsurprisingly created much hype. But now with the US slowdown spreading across the globe coupled with a declining dollar, advocates of the decoupling theory are debunking their claims. Even a couple of months ago, the Indian equity analysts were also claiming that India has decoupled from world markets. Now, with the specter of US recession gradually gaining strength, the decoupling theory appears to be fast losing ground. The new theory is that in this utterly globalized world no market can remain completely insulated from global shocks.
The idea of decoupling has come into the limelight over the past year. The argument put forward by the analysts at Goldman Sachs Inc. and Morgan Stanley is that the world would not suffer as it did during the previous US slowdowns. And so, accordingly, even if the US asset markets collapse, markets in the rest of the world could remain bullish. In other words, equity markets are insulated from external shocks and can stay aloft even without correlating itself with other markets. Their argument was that India and other emerging economies can remain unscathed regardless of what happens in the advanced world. |
