Developing countries: from the “de-coupling thesis” to victims of the global crisis

Martin Khor

It wasn’t so long ago that the “decoupling” thesis took hold: i.e., that developing countries had de-coupled their economies from the advanced countries, and were growing at far higher rates.

The (silent) accompanying tune was that these emerging and poor countries no longer need assistance from the rich nations, which had become the new laggards of the global economy.

When the 2008-2010 financial crisis hit, it was obvious that de-coupling did not hold, as developing countries experienced plunging exports, decline in commodity prices, lowered GNP rates and some poorer ones wobbled on the brink of new debt crises.

But the swift recovery due to G20 coordinated fiscal stimulus, low interest and massive pumping of developed country liquidity resulted in higher growth rates in the developing world and recovery of commodity prices, and the reiteration of the decoupling thesis.

It was expected that the developing countries would be more resilient than the richer countries in this new round of the global economic crisis.

However, it is becoming evident again that the South’s economic condition is still tied closely to that of the North.  Many developing countries are now beginning to experience economic difficulties in various ways.  The hopes that China, India and Brazil would take over as the locomotive of global growth or that Africa would continue to be buoyed by high commodity prices have been dashed.

Developing countries are being hit mainly by sharp falls in exports, and also by the slowing down or reversal of capital flows.  Whether the latest round of quantitative easing (QE3) announced last week by the US Fed will result in new capital surges to emerging countries remains to be seen.  And if it does, it will be a mixed blessing–reducing some financial pressures on the balance of payments in some countries but laying the foundation again for other problems.

Recent reports confirm the slowdown in many major developing economies.

In China, growth of the gross domestic product fell to 7.6% in the second quarter of this year, signifying a continuous deceleration from 10.4% in 2010 and 9.2% in 2011. Exports in July were only 1% higher than a year ago, indicating the country cannot continue to rely on its export-led model. The decline of its import growth to 4.7% in July from a year earlier also shows that other countries can’t rely on China to offset the slowdown in Europe.

India’s economy is also slowing, with GDP growth of 5.3% in the first quarter. Its industrial output has been falling continuously in recent months, declining 1.8% in June.  Exports fell 5.5% in June. The rupee’s level hit a record low of 57.3 to the US dollar on 22 June. Foreign exchange losses have affected profits of some big local companies.

The Singapore economy contracted 1.1% in the second quarter over the previous quarter at an annualised rate, mainly due to manufacturing output falling by 6 per cent.

In Brazil, where GNP growth was 7.5% in 2010, the government lowered its growth projection for 2012 to 3% while private economists have forecasts of 1.5 to 2 per cent.  Industrial production declined by 4.3 per cent in the 12 months to May.

Argentina’s GDP growth was 8.9% in 2011 but the economy contracted by 0.5% in the 12 months to May and industrial production in June fell 4.4% on the year.

In Chile, the Central Bank forecasts an economic slowdown in the second half, and its $95 million trade deficit in July compares to a $1 billion surplus in June.

In South Africa, growth in the first quarter was only 2.7% (over the previous quarter), and manufacturing production in June declined 2.4% from a month earlier.

The London-based Overseas Development Institute has predicted that the European countries’ austerity measures will affect many African countries through export decline and declines in remittances, foreign investment and aid.  

According to a South Centre paper by Yilmaz Akyuz, (see www.southcentre.org) the theory of the “staggering rise of the South” had vastly exaggerated the developing countries’ de-coupling from developed countries. Much of the high growth in developing countries in the past decade has been due to the favourable external conditions generated by the Western countries, such as the high consumption growth in the United States and the boom in capital flows into major developing countries.

After the 2008-2009 global crisis, the strong anti-recession actions in developed countries resulted in the resumption of export growth and capital inflows in the developing countries.

However, with the developed countries ending their reflationary policies and instead switching to austerity budgets and with their low interest rates having little effect, the recessionary conditions in Europe are now having adverse impacts on developing countries.

With the positive conditions that supported the South’s rise no longer in place — in fact with conditions turning negative, developing countries’ prospects have dimmed, prompting the need for a change in development strategy.

Martin Khor’s email is mkhor@igc.org