Economic Decoupling (1): Concept

From the Subprime crisis to Lehman’s bankruptcy, economic instability has triggered apprehension as to its possible effect on Thailand’s economy.

Conventional International Economics is based on the concept of a world economy that is at this time profoundly interdependent. This being so, an economic crisis in one country will affect others through export and import, and when a country faces an economic crisis, which by definition means a decline in national income, it will inevitably reduce import from other countries. Moreover, if the crisis takes place in a big country, such as the USA, which is a major trade partner of the rest of the world, a decrease in US import will therefore sharply decrease other countries’ export, ultimately leading to economic slumps all over the world.

A chapter in Thai history may corroborate the above theory. During the 1930’s, the Great Depression in USA affected Siamese fiscal balance so severely that a political revolution followed.

Surprisingly, amidst the current globalization trend is the fresh idea of Economic Decoupling, which refutes the traditional theory that a crisis in US will unnecessarily affect other countries.

Supporters of Economic Decoupling suggest that intraregional trade is now becoming more and more significant and that some populated countries such as China and India –possibly including Russia and Brazil –now enjoy high economic growth rates.

Therefore, USA may not be “Big Brother” any more, and should the US economy collapse, the rest of world may not experience such harsh, crippling results.

However, there is opposition to Economic Decoupling in that, although export to USA is on the wane, a substantial quantity of export is intermediate goods, which are imported as materials for other production processes, whereas USA is still a major final goods importer.

For this reason, though Thailand does not export to USA directly, if Thai exported goods are intermediate goods which become materials for producing final goods consumed by US consumers, then US import reduction will affect Thai export and, finally, the Thai economy.

Next time, we will analyze some data to see how that theory is substantiated.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com