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The Effects Of Globalization: Convergence Or Decoupling Over Time?
Given the dramatic changes in the global economy over the past several decades, how have the correlations among international business cycles changed through time?
Conventional wisdom would suggest that the forces of globalization have led to a convergence in national business cycles and an increased risk for financial spillovers, or "contagion." Economies around the world have generally become more integrated through the linkages of trade, finance, and banking. Statistics from the International Monetary Fund (IMF) show that the ratio of world trade to world GDP has nearly doubled over the past three decades, while the gross external assets of developed and emerging markets have risen exponentially over the same period.
At the same time, the process of globalization has been accompanied by several structural changes in the world economy that have contributed to a less U.S.-centric global economy. Most importantly, intraregional trade has grown relative to traditional trade links between emerging economies and the developed world. The impressive performance of some emerging countries has led to a greater diversification of trade destinations, as emerging economies have begun to trade more often with each other.
Some analysts argue that the developments in the emerging markets have been so drastic that the emerging markets have decoupled from the rest of the world. According to the decoupling hypothesis, the emerging market business cycle is now unaffected by U.S. economic growth. However, Figure 6 delineates a number of arguments that would run counter to the emerging-market decoupling hypothesis. The relative decline in trade linkages of emerging markets with the United States, for instance, must be weighed against increased financial linkages with developed markets.
How Closely Do Developed And Emerging Markets Now Move Together?
To investigate the countervailing forces of global integration and decoupling, Figure 7 shows the correlations in real economic activity between the developed and emerging economies over a rolling 10-year period. Figure 7 reveals two stylized facts. First, there has been only a modest rise in correlations between developed and emerging market business cycles since the 1950s. This observation is consistent with the results of several studies, including Stock and Watson (2005), which have found minimal evidence of increased international synchronization of business cycles, despite increases in international trade flows, integration of developed markets, and the introduction of the euro.
The second obvious pattern of Figure 7 is that correlations in international business cycles vary meaningfully over time. Indeed, the time-varying correlations underscore the important role that systemic asset-price shocks (i.e., "contagion" or "terms-of-trade" shocks) can have on the co-movement of international business cycles. For example, the massive oil-price shocks of the mid-1970s and early 1980s (and their economic and inflationary fallout) formed a primary channel through which international business cycles moved more in tandem during that period (Kose, Otrok, and Prasad, 2008). Most recently, co-movement has risen following the bursting of the global IT bubble in 2000, the ensuing global slowdown, the subsequent global economic boom, and the recent financial crisis.
Conversely, correlations among developed and emerging economies turned negative during the 1990s, since many economic shocks did not engender global systemic crises. For instance, the savings and loan crisis in the United States and Japan's "lost decade" during the 1990s remained more localized, thereby having a more subdued influence on other countries.
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