As we enter 2008, the countdown is well under way for August’s Olympic Games in China. Yet, months before the Olympic torch sparks into life in Beijing, China and its fellow Asian nations have already raced into a position of global leadership.

This year, emerging-market nations, led by Asia, will overtake the rich countries of the developed world to become the most important collective engine for global growth.
As the mighty U.S. economy falters and once-so-superior Europe stumbles, China, for the first time since the early 19th century, will become the largest national contributor to world economic expansion.
That will be true whether China’s impact is calculated by measuring what it produces at market values, or after making adjustments so that a dollar would buy the same goods if it was spent in Beijing or New York.
This historic – presumably temporary - passing of the baton of global economic leadership from the West to the emerging powers of Asia is a moment as remarkable as the breaking of the four-minute mile.
However, as Western governments confront the industrial world’s diminishing prospects in what will be their most testing year since the start of the century, the passing of this milestone has left markets fretting over two crucial questions.
First, can these emerging markets really sustain their out performance, charging ahead at the front of the field even as the big economic powers of the Group of Seven developed countries fall behind? Secondly, will their stamina help to sustain the West’s failing performance?
The good news is that the odds look very much in favor of Asia and emerging markets sustaining their strong performance this year despite the G7’s plight, a phenomenon that economists have dubbed “decoupling”.
The bad news is that while this trend will help to bolster global growth, its benefits to the industrialized world will be limited and are likely come at a significant cost, both literally and metaphorically.
Skepticism over the decoupling idea remains pervasive among financial markets as well as policymakers. The old dogma that if America sneezes the rest of the global economy must inevitably catch a nasty chill remains a deeply rooted piece of conventional wisdom – understandably so, since investors or governments dismiss the potency of the U.S. economy as a driving force at their peril.
Yet the reality is that this familiar prognosis of inescapable global contagion from America’s ills is almost certainly misplaced. Crucially, the exposure of Asia and other emerging markets to this U.S. downturn is vastly less than their vulnerability to the fallout triggered by the dot-com bust of 2000.
In the previous U.S. downswing, there was no escape for emerging markets. The huge bubble in internet and technology-related shares was not only an American but also a worldwide trend. When Wall Street fell, stock markets across the world, including those in emerging markets, were, unavoidably, hit. The impact of the financial toll on Asia was then magnified since the region’s factories were the world’s workshop for huge quantities of the high-tech gear for which demand abruptly slumped.
This time round, things are drastically different. The origins of U.S. economic woes lie in its residential housing market, a sector that has its impact almost wholly within America’s borders. As Merrill Lynch puts it: “The world does not build American houses.”
True, the knock-on effects of the U.S. housing slump have spread across world markets thanks to the vast losses inflicted on financial institutions by greedy and misplaced bets on home loans to “sub-prime” borrowers. Yet most of these losses appear to be shouldered by American and European banks, with Asia so far little-affected.
Emerging markets are also poised to benefit from an influx of footloose global capital fleeing more vulnerable Western economies, which will help to bolster Asia’s momentum. As America cuts interest rates to shore-up activity, and the productivity, and profitability of its companies wilts, funds are likely to seek out higher Asian returns.
These encouraging circumstances suggest that the decoupling theory is set to be borne out in practice. Asia’s pumped-up economies, which have worked hard to become fitter and readier for the testing times of another world slowdown, may emerge as the clear winners from the downturn that is taking hold. Asia’s likely resilience this year should offer at least some support for the West’s flagging growth. Importantly, it will provide a market for rising U.S. exports made more competitive by a sliding dollar as the big global imbalances of the past decade begin to unwind.
There may, though, be a nasty sting in the tail from the strength of the Chinese dragon and its Asian cousins. The likely blow comes from the serious danger that the persistently buoyant growth in emerging markets, even as the industrial economies slow, will inflame inflationary pressures in the West by continuing to drive up key commodity prices, especially for foods, metals, and oil. This danger is compellingly spelled out in a new analysis by Stephen King, chief economist at HSBC. In the past, the global weight of the West’s demand usually meant that when its big economies slowed, commodity prices would drop. This helped to ensure that weaker growth in the G7 generally went hand in hand with subdued inflation. Now, however, King finds that this relationship is breaking down as Asia’s immense appetite for resources prevents commodity costs subsiding, even as growth falls in developed economies.
The implications are ominous. The clear threat is that G7 central banks, fighting to protect growth in the West's economies, are liable find their scope to cut interest rates badly hampered by commodity-driven inflation imported from emerging markets. The passing of the torch of global growth to Asia may yet leave the West’s hands badly singed.
(Source: Times Online)