DEVELOPMENT: China, India, ‘Decoupled’ From US Crisis

By IPS Correspondents Reprint | | Print |

Ravi Kanth Devarakonda

DAVOS, Jan 24 2008 (IPS) - China and India have claimed that that they are “decoupled” from the credit and banking crisis in the United States.

Faced with renewed calls that the two emerging locomotives of the world economy have to take a bigger burden in mitigating the impact of the meltdown in the U.S. banks due to the sub-prime mortgage crisis, leaders from the two Asian giants said at the World Economic Forum’s annual Davos meeting that their economies are placed in a dynamic of their own.

“India’s economic growth is driven by its domestic demand which is growing at a brisk pace,” said India’s trade minister Kamal Nath. “We are not worried by the developments in the U.S. economy,” he told IPS. “India was never coupled with the U.S. economy.”

“We do not want a big trade surplus, it is a big problem,” said Cheng Siwei, vice-chairman of the standing committee of China’s National People’s Congress. He said the Chinese economy can withstand a reduced demand from U.S. consumers for Chinese goods.

U.S. trade policy experts agree that the impact of the recession on the emerging economies would not be severe. “I believe the world economy has in fact largely decoupled from the U.S.,” said Fred Bergsten, director of the Peterson Institute for International Economics.

Participating in a session on the impact of the U.S. recession on emerging economies, Bergsten said “the emerging markets now account for roughly half the world economy; even if they slow down by half a percent or so, they are still going to provide substantial growth in the 6-7 percent range. Even if the industrial world drops down into the 1-2 percent range, world growth will be in the 4 percent range.”

In an interview to IPS, Nandan M. Nilekani, chief of the Indian information technology giant Infosys, said “the Indian economic fundamentals are strong because of several factors.” These include “technological innovation, a robust labour force, and innate strength of innovation.”

If there is a global slowdown all economies would be affected to some extent, “but India is placed in a different situation and not in the same league as some other emerging economies,” he argued.

But many participants at the WEF meetings, which focused a great deal on the emerging recession in the U.S. economy, called for strong leadership. “The thing that markets are desperate for right now is leadership, whether globally or regionally, and it seems this is lacking,” said John Studzinski, head of the U.S. private equity firm Blackstone.

“Until the markets see a lot more leadership on a proactive basis rather than a reactive basis, you are going to continue to see this great anxiety, and feel frustration,” he said.

China has recently invested in Blackstone, a development that has prompted analysts to examine the role played by so-called sovereign wealth funds from the emerging economies.

Increasingly, sovereign funds have come to the rescue of leading financial banks such as Citibank and UBS to face the sub-prime mortgage crisis. “I would make an argument today that the greatest single benefit to the longevity of the U.S. financial structure is investment made by sovereign wealth funds (into financial institutions),” said Michael Klein, a senior Citigroup official.

But there are growing fears about possible “financial protectionism” as the political elite in France, Germany and even the U.S. are raising fresh concerns about the control of their prized assets by sovereign funds from the emerging markets.

“The questions are very much that (sovereign wealth fund) investment in future continues to be commercially driven, and in no way shifts to political (drivers),” said David Mccormic, U.S. Undersecretary of the Treasury for International Affairs.