Issue of the week: Developing economies feel the crunch

So much for “decoupling,” said Martin Fackler in The New York Times. Back in 2007, when the U.S. press was first reporting hiccups in the then-obscure subprime sector of the mortgage market, many economists argued that the developing nations of Asia and Europe would largely escape America’s woes. Thanks to strong export growth, those countries had “decoupled” from the ups and downs of the U.S. economy—or so the theory went. Now we know better. In reality, “emerging markets around the globe have come under simultaneous pressure from the financial tsunami that started in the U.S. mortgage market.”

From Dubai to Bangkok, foreign capital is deserting developing countries, said Patrick Barta in The Wall Street Journal. “The heavy reliance on exports that has driven Asia’s powerful growth has turned now into its worst enemy,” as the economic downturn in other countries curbs demand. South Korea’s currency, the won, and its stock market have fallen more than 30 percent since last summer. Newspapers in Thailand are running articles about coping with the stress of being laid off. And in Dubai, a $300 billion building boom has come to a shuddering halt as lenders shrink from making new commitments.

No region is immune to the contagion, said Daryna Krasnolutska and John Martens in Bloomberg.com. “Eastern Europe is being buffeted as investors, stung by losses in developed nations, sell riskier emerging-market stocks, bonds, and currencies.” Ukraine this week obtained a $16.5 billion loan from the International Monetary Fund, and Iceland, which is virtually bankrupt, raised interest rates to an eye-popping 18 percent to lure foreign investment. Although Iceland is geographically a Nordic country, its problems resemble those of Asia’s developing nations, said Andrew Pierce in the London Daily Telegraph. Iceland relies on natural resources—fishing, geothermal energy, and hydropower—for its wealth, and on foreigners for its capital. But that foreign capital fled when the credit crisis hit, leaving the country saddled “with liabilities in excess of $100 billion—liabilities that now dwarf its gross domestic output of $14 billion.” The IMF has granted Iceland a two-year, $2 billion loan, but the country needs at least an additional $4 billion. Sweden, Norway, and Denmark are assembling a loan package, but it comes too late for thousands of laid-off workers. A prolonged recession, if not a depression, seems inevitable.

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And now the Chinese economy also “looks headed for turbulence,” said Gordon Chang in Forbes. Growth in the developing world’s largest economy has stalled in recent quarters, and it’s likely to dip further as the U.S. and other Western countries buy fewer Chinese exports. About 10,000 factories have closed “in China’s export powerhouse, the Pearl River Delta in Guangdong province,” and an additional 20,000 are expected to close next year. Until recently, the export sector’s “exuberant growth” masked China’s social problems—widespread poverty, corruption, and rising income inequality. In the coming months, those problems are likely to push to the surface, with consequences we can’t begin to predict.