Rapid acceleration of growth in developing countries (DCs) and the widening of their growth gap with advanced economies (AEs) before the outbreak of the global financial crisis were widely interpreted as decoupling of the South from the North. In the early days of the crisis, there were also widespread expectations that growth in the South would be little affected by the difficulties facing AEs. In fact, DCs slowed considerably in 2009 as a result of contraction of exports to AEs and financial contagion. However, they recovered rapidly, with growth rates in 2010-11 matching or exceeding the levels seen before the crisis, while recovery in the US has remained weak and erratic, and Europe has gone into a second dip. This has again revived the decoupling thesis, notwithstanding the sharp slowdown in many major DCs over the course of the current year.
This change of sentiment about decoupling reflects lack of sound knowledge and understanding of the evolution of growth fundamentals in DCs and their global linkages. In an earlier IMF Working Paper Kose, Otrok and Prasad (2008) analysed global business cycles and found decoupling between DCs and AEs, but increased coupling within each group. Wälti (2009) challenged this and argued that assessment of decoupling should not be based on actual growth rates but deviations from trend (or potential output). On that basis there is no decrease in the synchronicity between DCs and AEs. Rose (2009) came to broadly the same conclusion, while Yeyati (2009) showed that in fact the 2000s witnessed an increase in the correlations of DCs and G7 cycles.