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Friday, January 15, 2010

Economic Decoupling Theory - Present Status

The market performances of the past two years have shown that the widely popular 'Decoupling Theory of Emerging Markets' has proved to be wrong. As per the theory, the emerging economies, especially the BRIC economies, have broadened and deepened enough so that they were insulated from US recession. But in reality many of these economies were worse hit than the US economy during the recession period. For more in this regard, read decoupling theory of emerging markets.

Experts now come up with many reasons for the failure of the decoupling theory.
  1. The theory was a premature one; and even the basic assumption was not all that right. Perhaps the emerging markets have not yet broadened and deepened enough to decouple.
  2. Although the GDP growth for these nations has shown increase recently and new trade relationships have been developed, the US is still their primary trading partner. So decoupling from the US economy is not easy.
  3. The popularity of decoupling theory itself tempted many US and developed nation investors to invest hugely in emerging markets. When investors withdraw their money, these economies shrink.
  4. The proponents of the theory neglected the effect of one other major well performing theory - the theory of globalization, where one economy is tightly coupled to another.
One possible reason for the popularity of the theory was the good performance of emerging markets during the first phase of US recession where the economic slowdown was entirely domestic because of the crash in the housing sector.

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posted by NobleTrading at 8:46 AM

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