Coupled

Over the past few months, the word “decoupled” appeared with increasing frequency in the business pages.

It is a word used mainly by analysts desperately hoping that the world was not really that interlinked, that even if the US went into recession, the other regions of the globe will provide self-generated momentum to keep the world economy expanding. I have gone through so much material over the past year celebrating the magnitude of the BRIC economies: the rapidly rising economies of Brazil, Russia, India and China.

India and China have a combined population of over 2 billion people. Both economies have posted impressive growth rates over the past decade. Many analysts had hoped that they would continue to drive growth for the other emerging economies.

But the more recent evidence appears to indicate that the economic regions of the world are more coupled than decoupled.

Without exception, all of the world’s economies are, to varying degrees, trying to cope with an inflationary surge combined with a diminished growth momentum. The reason for this is that the inflationary epidemic is caused by rising commodity prices traded globally, principally oil and food.

I was going through a paper prepared by Prof. Norbert Walter of the Deutsche Bank’s think tank. He was not very optimistic about the near term.

Prof. Walter sees commodity prices rising well into 2009. That will ensure that inflation will continue to be a problem across the world’s economic regions.

As central banks respond to the inflationary threat by raising interest rates, there will be pressure for most currencies of the export-dependent countries to appreciate. Appreciating currencies will cut export growth, particularly exports destined for North America and Europe where consumer demand is expected to remain weak into the medium term.

This problem of appreciating currencies and declining exports is particularly true for the East Asian economies. The once hyper-performing economies of this region were expected to carry much of the weight for global economic expansion.

These economies, all dependent on oil imports, were buffeted by the price spiral we saw the past two years. They were further shaken by the spiral in grains prices we saw this year. Both have pushed up inflation rates, in turn forcing their central banks to raise policy rates at the expense of cutting growth.

All dependent on exports to the mature industrial economies of North America and Europe, East Asia saw its export juggernaut shrivel the past year. The Philippines, which saw its currency appreciate dramatically in 2006-07, is now seeing its export sector drying up.

Prof. Walter points out that the housing mortgage crisis, that pushed the US economy to the brink of recession and sent out strong ripples of financial volatility across the globe, appears to be replicated in Europe. In Spain, for instance, property prices have fallen two-thirds the past couple of years.

Europe’s financial institutions, already rattled by the fallout from the subprime crisis in the US, could be further weakened by falling property prices in the continent. The UK is in particularly bad shape, as we see in the rapid depreciation of its currency the past few weeks.

In Asia, we could hardly expect Japan to provide the economic leadership it used to enjoy. The Japanese economy will likely sink into recession this year.

Plagued by political problems, neither Latin America nor Africa are in a position to help shore up global growth.

Last week, another giant investment bank, Lehman Brothers, reported losses of $4 billion. Its stock has since lost nearly half their value. The company is now up for sale.

Before that, the US government took over the twin mortgage giants of Fannie Mae and Freddie Mac to save them from bankruptcy. The takeover inspired the stock market for a while until the magnitude of the financial problems plaguing Lehman Brothers set in.

While financial volatility emanating from the mortgage crisis in the US hounds the global markets, trillions of dollars are being transferred from the oil importing economies to the oil exporting countries. This is the largest wealth transfer in human history and it is happening very quickly.

Any scenario for global economic recovery should hinge on how this vast oil fund is redeployed for investments elsewhere. Many oil exporters have sparse populations that do not constitute significant markets for the exporting economies.

The Philippines, like nearly all its regional neighbors, has failed to meet its growth targets so far this year. A month ago, I sort of expected we could manage to at least meet the lower end of our (already adjusted) growth targets. That now seems unlikely.

The point is, the world has become more closely interlinked than we care to imagine. When commodity prices rise, they rise at the same rate across the globe. When interest rates have to be determined, they are benchmarked with rates that prevail in similarly situated markets.

We march in step. Not because we want to but because we need to. If our interest rate regime, for instance, deviates too much from those prevailing in other similarly situated market, it will force our currency to appreciate more than what would be healthy to maintain our growth.