It's becoming one of the more hotly debated questions among those seeking a way out of the global recession: Is the world economy powered by one engine or two?
The speed at which the financial meltdown in the United States pulled the rest of the globe into a death spiral suggests the answer is clear. But the surprising resurgence of China, India, Brazil and other emerging markets is giving new life to a theory that the crisis appeared to make fanciful.
The Organization for Economic Co-operation and Development said last week that these countries appear to have shaken off the recession, even as the economies of the big industrial nations that make up the OECD's membership show few signs of life.
Since the fall of the Soviet Union, global economic growth has accelerated and slowed with that of the United States, which accounts for about 25 per cent of the world's output.
That China and some of the other big emerging markets can rebound with little or no help from the U.S. is causing economists to ponder anew whether these countries have “decoupled” from their dependence on American consumers and bankers.
Policy makers such as U.S. Treasury Secretary Timothy Geithner and Bank of Canada Governor Mark Carney are counting on demand from these nations to jump-start their economies by creating markets for exporters and boosting commodity prices.
If they are right, the deepest global recession since the Second World War could end sooner than many thought possible.
Over the longer term, stronger emerging markets offer the promise of stability because exporting countries such as Canada, Germany and Chile won't be at the mercy of the spending habits of U.S. consumers.
That thinking already is guiding Canada's trade policy. Trade Minister Stockwell Day – who has visited India, China and the United Arab Emirates since January – says he considers the bigger emerging markets a new engine of economic growth.
“What you are doing, especially in a time of economic downturn, you are opening doors of opportunities where maybe ones close by for you are temporarily closing,” Mr. Day said yesterday on a conference call from Jordan. “The result will be increased activity.”
Mr. Day's most recent trip also included stops in Russia, the OECD's annual ministerial meeting in Paris, and Saudi Arabia. In Paris, Mr. Day said he met his Indian counterpart, and made making progress on a possible “comprehensive [trade] agreement” with a country whose economy the International Monetary Fund says will grow 4.5 per cent this year, even as the global economy contracts.
The “decoupling” theory was popular a few years ago when trading countries appeared to be holding their own as the world's largest economy stumbled. But the global credit crunch that ensued made the decoupling notion look incredibly naive.
The U.S. recession began in December, 2007, according to the National Bureau of Economic Research, which dates the business cycles. By the second half of last year, it was clear the U.S. was taking the rest of the world down with it. World trade collapsed, robbing China of its primary means of pulling its massive population out of poverty. Canada's first recession in almost two decades began in the final quarter of 2008.
“It proved to be nonsense,” John Curtis, a distinguished fellow at the Waterloo, Ont.-based Centre for International Governance Innovation, said of the decoupling theory.
Recent economic indicators are causing some to wonder whether they were too quick to give up on the theory.
Research by the IMF released in mid-2008 showed that the business cycles of the U.S. and Europe were converging and the business cycles of China and India were converging – in other words, the rich world and emerging markets were decoupling.
The OECD, which released its latest economic outlook last week, observed that China, India, Brazil, Russia and other non-OECD countries were leaving the richer countries behind as their large and growing populations soak up their governments' economic stimulus measures.
There's also evidence these countries are relying more on each other. In March and April, China passed the U.S. to become Brazil's largest export market and China already was the largest exporter to India.
Still, there's reason to believe the big emerging markets are experiencing a temporary jolt from stimulus spending rather than a true break from reliance on export markets in the U.S. and Europe.
This might not last. Mr. Curtis says these countries still aren't rich enough to sustain rapid growth without exporting to richer countries.
“It will help bring us back,” Mr. Curtis said of the growth in emerging markets. “But basically, we have to get the U.S. organized.”