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Summit theme one - Interdependencies

The collapse of Lehman Brothers in September 2008 was a seismic event for the global economy. A financial crisis in the developed world quickly became an economic crisis. Major economies fell into recession, real estate markets collapsed and unemployment rose. At first, there was an assumption that the world’s emerging markets would somehow be insulated from the crisis and that the problems that emanated from the developed world would largely be confined to those countries. With growth in leading emerging economies, such as China and India, remaining strong (even if it had fallen from previous highs), there was widespread discussion that these markets would “decouple” from countries in the west.

As numerous speakers at Globalisation Redefined, an Economist Conferences event held on September 17^th and 18^th, explained, the events of 2009 have shown that decoupling as a concept should be treated with considerable skepticism.

If anything, the current crisis has revealed strong interdependencies between developed and emerging markets. Leading economies, such as the US and Eurozone, have seen a collapse in domestic demand as consumer confidence has dipped and as the process of deleveraging slowly unwinds. This has had a dramatic impact on export-led economies in the emerging world. As one leading politician at the conference said: “When we contract, they contract.”

Political and business leaders from countries as diverse as Tunisia, China, India and Rwanda who spoke at the conference were unanimous in their view that a decline in external demand had had a negative impact on their economies. In addition, as investors sought save havens such as US Treasury Bills, there were substantial capital flights from emerging markets. This fed though into the real economy as a decline in lending to businesses in emerging market regions.

In China, for example, external demand fell sharply. Exports in the first quarter of 2009 were down by more than 20%. Orders were cancelled, leaving manufacturers to run down existing inventory. Here was globalisation in action, with external shocks transmitted through highly interlinked markets until they affected both developed and developing countries alike.

Trade-dependent economies in South-east Asia, such as Singapore, also suffered. In Central America, Mexico experienced a significant decline in GDP as a result of a slump in consumer demand from its neighbour, the US.

In Africa, a region that some had argued would be insulated from the crisis because of its relatively weak links with the global financial system, the value of exports dropped because of a decline in demand for commodities. Moreover, it became clear that the underlying problem – Africa’s isolation from financial markets – was an issue that itself needed urgently to be addressed.

The interdependence of developed and emerging markets highlights the need for vigilance against a return to protectionism. The mistakes of the 1930s, when the Smoot-Hawley Act unleashed a tide of economic nationalism, must not be repeated, stressed many participants. Instead, there should be concerted efforts to facilitate trade. “Anything that boosts trade, rather than restricts it, has an important role to play in generating and sustaining a global economic recovery,” said one speaker.

Equally, said one political leader, one must not assume that, just because the worst of the crisis may be over, policy-makers and business leaders can lower their guard. “We are only at the beginning of the upturn and it is only limited to certain countries,” he said. “The recovery remains fragile.”

In addition to closer co-ordination between developed and developing countries, the interdependencies within emerging markets also emerged as a strong theme in the conference. Some speakers felt that emerging markets could do more to build coalitions around common interests. Within large geographic regions such as Africa, for example, it was suggested that there is a lot to be gained from reducing duties and tariffs on exports. This is particularly important as the cost of doing business and transporting goods can often be very high in this region, which ultimately pushes up prices for consumers.

Many speakers suggested that developed and emerging markets have “a shared responsibility” to steer the world towards a sustainable recovery. This means implementing policies to boost mutually beneficial trade, re-energising the process behind the Doha round of trade negotiations, putting in place policies to correct imbalances in the global economy (see next article) and fostering greater co-operation in expanded multilateral governance forums. For the first time in many decades, the world faces a global economic crisis, and solving it will require global co-ordination.