Globalization Is Not Standardization

Guillermo Kopp, global research fellow at the research and analysis firm TowerGroup, believes that part of the reason why expectations for emerging markets were downgraded so dramatically early in the year is that people tend to oversimplify globalization. Many observers wrongly assumed that globalization would result in equal pain being felt worldwide. “[But] it isn’t about standardization;it’s about increasing inter-dependencies between markets,” says Kopp.This distinction also undermines the decoupling theory, though. “Despite improvements in some emerging markets, it is wrong to suggest that decoupling is occurring between developed and developing countries,” says Kopp. “Demand still comes largely from developed markets, and the ability of money to move instantly has a profound effect on emerging markets.” Templeton’s Mobius agrees: “It is ridiculous to suggest that emerging markets can be separated from developed markets in terms of trade and capital flows and communications. Decoupling simply does not exist.”Instead, the current divergence of growth between developed and emerging markets can be explained by the different backdrop each had to the financial and economic crisis. Crucially, this is a recession—no economists are claiming a 1930s-style depression is imminent—attributable to too much leverage. However, leverage was not evenly distributed throughout the global economy. Instead, it was overwhelmingly concentrated on developed economies’ assets, ranging from personal mortgages to super-leveraged collateralized debt obligations.Rather than simply making the assumption that the near-collapse of the Western financial system will decimate emerging markets’ economic growth, it is important to draw a distinction between financial markets and the real economy. “There’s a creative tension between the strength of emerging markets and the financial volatility in the West,” explains Kopp. “When demand increases in emerging markets, it has the potential to cause overheating in Western financial markets. Similarly, when Western financial markets crumple, their downturn smothers emerging market economic growth.”