It's as if every major economy in the world's emerging markets structured its economy to take advantage of U.S. consumption, and only U.S. consumption.Of course, we know this isn't the case. Asia-to-Europe and Latin America-to-Asia trade, etc. expanded during the past decade, but then why is it that the end of the housing boom in the United States, and its accompanying slowdown in consumer spending, slowed demand seemingly everywhere -- in China, Brazil, Russia and in Europe?
Similarly, how is it that a banking crisis primarily rooted in the United States was able to propel a global financial crisis, in a multi-polar financial world? Economists and others speak of the great financial centers of the world -- London, Frankfurt, Hong Kong and Tokyo -- in addition to New York. How is it, then, that when New York has a problem -- admittedly its biggest financial crisis in generations -- the global financial system nearly freezes up, as we saw in the credit markets last fall? What ever happened to decoupling?
Decoupling schmuppling
The world just experienced five years of unprecedented growth in emerging markets. In theory, a problem in New York should not prevent Hong Kong from completing business with London. And wasn't Brazil's $1.8 trillion economy, Latin America's largest, diversifying as it grew by leaps and bounds? How then, do bad subprime mortgages in the U.S. trigger less spending on consumer goods by Brazil's citizens?
The rejoinder or counter to the above would argue that perhaps Brazil's economy -- and the economies of other developing world nations -- are not as diversified as we thought, and their middle classes are not as developed. And, in fact, this appears to be the case.
It now appears that despite the takeoff-stage years of globalization, 2003-2007, many developing economies, Brazil, Russia, Mexico and even China were still too export-dependent. Exports, as economist David H. Wang, a China expert, said, "are a great thing just as long as the music keeps playing." You make stuff everyone else's consumers want, ship it out, and the export revenue flows in, registering a nice inflow of wealth. The problem is, as China found out, "when the export sales disappear, so does the growth," Wang said.
So, among the many lessons from the current global recession (financial services regulation reform among them), the world's developing economies now realize that the world needs multiple consumption centers. The world economy needs middle classes and working classes in every region -- consumers that are capable of driving growth, serving as growth engines, not just an economy supported by consumers in the U.S., and by high rollers relaxing in the south of France during the summer.
If the global economy can get to that stage -- regionally-balanced growth -- that would be considered a theoretical advance, to use an academic phrase.
Financial Editor Joseph Lazzaro is based in New York.
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