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2015 | OriginalPaper | Chapter

2. The Decoupling of Emerging Economies, A Long-Debated Issue but Still an Open Question: A Survey

Author : Antonio Pesce

Published in: Economic Cycles in Emerging and Advanced Countries

Publisher: Springer International Publishing

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Abstract

Emerging economies (EEs) have progressively increased their role in the international economic scenario, to the point that the share in the global economy of EEs [together with Developing Economies] has now reached 50.9 % in 2013 (it was 30.9 % in 1980). From an economic point of view, their importance has grown along different dimensional paths, as mirrored by foreign direct investments and portfolio investments, total currency reserves and, in more general terms, their shares in international commercial and financial trade. Technological innovation, on the one hand, and policies encouraging commercial and financial trade, on the other, have lent significant support to integrating individual countries at global level (Globalization). During the globalization period, for the EEs the trade openness ratio rose from 30 % to around 80 % and more interestingly for the EEs the increase in international trade was accompanied by a significant rise in intragroup trading, which grew from 9 % of total foreign trade in 1960 to over 40 % in 2005. Given these evidences a set of issues about the decoupling hypothesis arise. For example, are the Globalization phenomenon and the Decoupling hypothesis incompatible? Which approaches did scholars adopt in the empirical investigation of the Decoupling hypothesis? How has the prevalent opinion among academics and leading international observers changed historically? All these issues have been long debated and this critical survey aims to retrace the steps of this debate.

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previous chapter Introduction

next chapter Is Decoupling in Action?

Data refer to Gross domestic product based on Purchasing-Power-Parity (PPP) share of world total. The source is the International Monetary Fund, World Economic Outlook Database, April 2013.

Trade openness is the ratio of total trade (export plus import) to GDP.

Inter-industry trade is the exchange of totally different products between countries. Intra-industry trade is the two-way trade of products in the same industry classification. See Krugman (1981) for more details.

Reference is made here both to the GDP growth rate and the deviation of GDP from its trend extracted by the HP (Hodrick-Prescott) filter (fully bearing in mind, however, the considerations made in following Sect. 2.2.1 on the possibility that the various trend extraction methods might not be equivalent).

Let me note that this reading of decoupling is implied by a more “extreme” concept which refers to decoupling as the notion that one area becomes a self-contained economic entity with potential for maintaining its own economic growth trend regardless of the economic trend of another area. This stance is quite extreme because decoupling is viewed as referring to almost complete regional insulation. It became a popular theme mainly in Asian policy circles in the first years of the 2000s when, despite the 2001 recession and the tepid economic growth of advanced economies from 2004 to 2007, the growth of India and China remained strong during that same period (Athukorala and Kohpaiboon 2009); nevertheless it did not received significant consideration in the economic literature.

One advantage of using economic indicators other than GDP could be, for example, the greater availability of information resulting from the higher frequency of data publication.

See, for example, Kose and Prasad (2010) for an extensive description of the time path of trade and financial linkages between countries and groups of countries.

In 2007, an estimated $240 billion in remittances went to developing countries, more than double the flow in 2001 (Federal Reserve Bank of Atlanta, 2008 conference “Remittances and the Macroeconomy,” February 21–22).

The total assets and liabilities contains debt, foreign direct investment (FDI), equity, financial derivatives and total reserves.

Jaimovich and Rebelo (2008) analyze the effects of news about future productivity on business cycles in a small open economy model.

The importance of decoupling in the definition of economic policies clearly emerges from analysis of the many reports by leading international institutions, e.g., the IMF (World Economic Outlook, April 2002, April 2007, October 2012), the European Bank for Reconstruction and Development (Transition Report 2009) and the Asian Development Bank (Asian Development Outlook 2009, 2010).

Known for coining the acronym “BRIC” for the world’s biggest emerging markets of Brazil, Russia, India and China in 2001.

Or more countries by averaging the correlation coefficients between pairs of countries.

The PPP-weighted aggregates (Purchasing Power Parity) of GDP and consumption in G-7 countries were used as the measure of world variables.

To further study and understand the change in the degree of synchronization, the authors also perform a regression analysis of the factors that influence correlations of each country’s macroeconomic variable with the corresponding world variable. For the output variable, their results are essentially in line with those of some other studies, e.g., as per Imbs (2004), and highlight the importance of trade and financial linkages in accounting for economic cycle comovement among emerging economies and the world economy. For consumption the results are weaker and only trade linkages appear to have a positive effect on cross-country movements in consumption.

The PPP-weighted aggregates of GDP in G-7 countries were used as the measure aggregate variable.

An investigation on the decoupling hypothesis with a special emphasis on the distinction between trend and cycle is presented in Dilip and Dubey (2013). The authors used two heavily data-intensive frequency domain methods: causality testing in the frequency domain and wavelet correlations. They needed to use a highly frequently available measure of output, so the authors employed the industrial production index on which data is generally available monthly. Their focus was on seven Asian emerging economies and, for both methods the conclusion offered strong evidence in favor of decoupling. As stated in Dilip and Dubey, frequency domain causation was suggested in the seminal paper by Granger (1969) and later extended by Geweke (1982, 1984), and the properties of wavelets are discussed in Percival and Walden (2000). See Dilip and Dubey for an overview of the two methods.

For example, this is the case of Artis and Zhang (1997, 1999) and Inklaar and de Haan (2001). They used the same data, different time windows and reached the opposite conclusion about the relationship between the economic cycle synchronization.

See Wälti (2012) for a detailed description of the indicator.

$ {g}_i(t)=\frac{\left({G}_i(t)-\overline{G_i}\right)}{\sqrt{\left(1/\left(T-1\right)\right){\sum}_{t=1}^T{\left({G}_i(t)-\overline{G_i}\right)}^2}} $ where $ {\mathrm{G}}_{\mathrm{i}}\left(\mathrm{t}\right) $ is the output growth rate of the country $ i $ at time $ t $ and $ \overline{G_i} $ is the arithmetic mean of the output growth rate over the period $ \mathrm{t}=1,2,3,\dots, \mathrm{T} $.

The emerging market countries come from different regions of the world: 8 Asian economies, 9 Latin American countries and 13 Eastern European economies.

Wälti explored three different alternative filters (Hodrick-Prescott, Baxter-King, Christiano-Fitzgerald) to extract the trend from the original data.

See Yetman (2011a, b) for more details.