Assignment One

The decoupling debate is back! Indeed, the notion that the health of emerging markets is no longer determined by the ups-and-downs in developed economies -- or even that emerging markets may be insulated from global shocks -- has been in vogue of late.
Last fall, the collapse of Lehman Brothers and the ensuing stock market crash dragged down emerging markets: decoupling seemed dead. Now, pundits who recently mocked the hypothesis are starting to wonder aloud if there might after all be something to it. The IMF forecasts that advanced economies will contract 3.8 percent in 2009; emerging economies are expected to post 1.6 percent growth this year. And international investors are flocking to emerging markets, which have beat those in developed countries by nearly 50 percent in the past six months.
Yet, neither the synchronized turndown nor uneven rebound is sufficient to prove decoupling true or false. The term is amorphous, and perhaps best used as a Rorschach test for the proclivities and interests of its wielder. But the underlying concept has staying power. And certain aspects of the decoupling hypothesis are important to examine, to see what they portend for the future of the global economy.
First, there is a good deal of confusion about the distinction between cross-country synchronization of financial markets and economic activity. With capital and news flowing more freely and quickly across borders, stock markets around the world are increasingly synchronized. This makes it highly unlikely that we would observe a prolonged period of decoupling in financial markets.
Stock market indices are, of course, a good source of information about countries' overall economic prospects. But stock prices are more volatile than fundamental economic indicators: They react much more quickly to good and bad news. In emerging-market economies, this is