COMMENT With the recent sharp decline in Chinese manufacturing output, the global decoupling theory seems to have died a well-deserved death. The idea that developing countries had become less dependent on US economic conditions, and so were insulated from the US crisis, was based on a potent combination of bad analysis and wishful thinking. In fact the first stage of the crisis has primarily affected trade-deficit countries, which included many of the rich countries. The second stage will see the crisis move to trade-surplus countries, most of which are in the developing world.
The dependence of developing countries on US demand should have been obvious from the global balance of payments data, which show the US trade deficit and developing country trade surpluses rising as a share of global gross domestic product in an almost unbroken line from 1997 to 2007. This suggests that there is a lot more of the crisis to come. To date the crisis has mainly involved adjustment among the large over-consuming countries: the US, Spain, the UK, France, Italy and Australia. In each case the credit crisis has all but eliminated the debt-fuelled consumption binge that enabled their large trade deficits. But that cannot be the end of the story. The global balance of payments must balance, and a reduction of consumption by one sector in the global balance must come with a corresponding adjustment.
