Tuesday, October 6, 2009

Trend decoupling in the world economy?

In a WB working paper, Milan Brahmbhatt and Luiz Pereira da Silva, point out that while there has long been a close correlation between economic cycles in developed and developing economies, in recent times this has been combined with systematically higher growth rates in developing relative to developed economies. In other words, while "there has been no decoupling in the cyclical component of developing country growth", "there has arguably been a decoupling in underlying trend rates of growth".

The authors feel that this "trend decoupling", whereby the developing economies will outpace their developed economy counterparts in their rates of growth, will be sustained irrespective of what happens in the developed economies. They draw attention to the wide scope for technological learning and catching-up for developing countrties, given the existing "convergence gap", and the consequent massive potential for "structural change" – the shift of capital and labor from low-productivity to high-productivity sectors. Further, the underlying macroeconomic and vulnerability indicators of the emerging economies look robust enough to generate sustainable domestic consumption and investment driven growth.

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