Insights from the World Economic Forum

Before you fall off of your seat, let me assure you that I was not at the World Economic Forum myself :). But, I recently had the opportunity to talk to Dr. Laura Tyson who had just returned from Davos. Dr. Tyson was the chairperson of the council of economic advisers to President Bill Clinton during his administration. She has been attending the World Economic Forum (WEF) every year for the last several years.

Dr. Tyson pointed out that the idea of “decoupling”, which basically suggests that emerging economies can continue to grow somewhat independently of the economic situation in the United States, seemed to have made a come-back at the WEF. In a panel discussion, Larry Summers and other western economists were apparently focused on discussing ways to avoid a recession in the United States including suggesting the usual idea that Federal Reserve ought to relax its monetary policy etc. The moderator then turned to the Finance Minister of India Mr. P. Chidambaram and asked him how his country was planning to avoid a slowdown in its own economy to which he replied, much to the surprise of most in the audience, that he did not anticipate a slowdown.

It used to be the case that if the US sneezed, rest of the world would catch a cold. This seems to be less true today than ever before, particularly in the case of emerging markets. Turns out that despite all the talk of globalization, only 20% of the world’s cross border capital flows either originate from or are headed to emerging economies. The remaining 80% of the capital flows are among developed countries, mostly the US, Western Europe and Japan. This statistic might partly explain the decoupling effect. This is in fact a good thing for the emerging markets because when some very creative bankers in the US decide to securitize sub-prime mortgages and sell them off to unsuspecting investors as investment grade securities, the people who suffer from the resulting consequences are those with the 80% cross-border capital flow linkages; not the remaining 20%.

China is less decoupled with the US given that trade accounts for almost 2/3 of its GDP while for India, domestic consumption makes up about 2/3 of its national income. China may actually benefit from this tighter coupling as the US slowdown could help the Chinese moderate their scorching pace of economic growth.

Another interesting topic is about the compression of development time for emerging economies to get to the so-called “productivity frontier”. What used to take a century for today’s developed countries to achieve is being accomplished in one or two decades by emerging countries today.

Overall, some very thought provoking discussions. Hopefully, I will be able to report first-hand at some point in the future. :)