When the financial crisis first started to hit the US subprime mortgage market, there was frequent talk about decoupling — whereby the fast growing emerging markets had sufficient domestic demand and growth to escape relatively unscathed from the collapse in developed nations’ economies. This notion was quickly debunked, as currencies such as KRW and IDR went into freefall as did many emerging stock markets. However, the theory of decoupling may be more relevant on the way out than the way in. The US consumer still seems grossly overleveraged and the US government balance sheet continues to become more and more overstretched.
Going into the crisis, many emerging markets were heavily dependent on exports for their growth. However, coming out, these markets are going to be much more focused inwardly on domestic demand. Coming out of this crisis, we are going to see true decoupling, with the large emerging market countries bolting ahead on domestic, not export driven (at least not to the US), growth.