Cezary Salad

For anyone interested in emerging markets, the mot juste all of last year was the d-word: “decoupling”. In a nutshell, it’s the theory that emerging economies have gained enough critical mass to chart their own path to growth and prosperity independently of the developed economies in Europe and North America. In other words, a recession here shouldn’t automatically translate to a recession there.

In 2008, the concept became so controversial among economists that one could even catch the venerable Economist weighing-in on both sides of the debate (“Decoupling is not a myth” – March 6, 2008 print edition; “So much for decoupling” – 18 September, 2008 print edition).

This week, Newsweek’s international editor, Fareed Zakaria joined the fray. Zakaria, an astute observer of foreign affairs, argued in his June 8 Newsweek column (“Boom Times Are Back - Just not here in the United States”) that the global economy is increasingly going to become a tale of two worlds. In one camp, there will be the booming, hard-charging emerging economies like China, Indonesia, India and Brazil and in the other the lagging bastions of wealth and power like the US, Europe and Japan (unless, of course, the latter undertake drastic reforms to alter this inevitable fate).

For regular followers of Zakaria, this, of course, is nothing new; his bestseller, The Post American World, is an exposition on this very same paradigm. And he made the same point last year in an article for his previous employer, Foreign Affairs magazine.

But one paragraph caught my attention since, without naming the controversial d-word, Zakaria seemed to use it as a way to justify the tale of two worlds:

Over the past six months, much conventional wisdom about the economy has been discredited. The old experts who spoke with confidence about unending global growth—the boomsters—have been debunked. But the new pundits of pessimism—the doomsters—have demonstrated a similar hubris, ignoring any evidence that might complicate their story. Six months ago, stock markets around the world swooned in unison as the American financial system seemed on the verge of collapse. This led many to conclude that the emerging economies of Asia and Latin America had been growing only because of their exports to America and Europe; that they obviously had no independent strengths of their own and would in all likelihood collapse faster and more furiously than the sophisticated economies of the West. After all, these were Third World countries.

Not exactly. Zakaria’s got the big picture right – there is indeed a growing rift between these two worlds – but he oversimplifies the details of how this fits in vis-à-vis decoupling.

First, one ought to take a longer reference point than the last six months. After the credit markets exploded in August 2007, emerging markets were one of the first places investors went with their displaced capital. So then, like now, as markets peaked here in the US and in Europe, they continued to hum along in places like Brazil, Russia and China.

Then, of course, came the big crash in January 2008, when markets tumbled all around the world and the Federal Reserve made its emergency 75 basis point cut to stem a similar panic here in the US before markets opened on Tuesday, January 22, 2008. It’s that episode, much more than the post-Lehman collapse roller-coaster, that’s ground zero for any debunking. We saw then these “new pundits of pessimism” argue that the emerging economies would follow the US into recession and the “old experts” appeared debunked. Now, thanks to the recent bull market, it seems the opposite is true.

This, of course, sits well with Zakaria’s tale of two worlds. He cites China’s Shanghai index (up 45 percent this year), India’s Sensex (44 percent), Brazil’s Bovespa (38 percent) and Indonesia’s index (up 32 percent) as evidence of this debunking.

But it is more helpful instead to look at peaks and troughs. US markets (as measured by the S&P 500 Index), peaked in October 2007 and bottomed in March 2009. Stocks are a leading indicator, so this means that investors thought the US would enter recession around 1Q 08 and re-emerge sometime this year.

China’s Shanghai index likewise peaked in October 2007, but it troughed earlier – November 2007. India’s Sensex peaked in January 2008 and troughed in March 2009. Brazil’s Bovespa fared better, peaking in May 2008 and troughed in October 2008 (see chart below – interactive version is available here. Indexes are rebased to August 2007 and presented on a logarithmic scale; I left Indonesia out since I don’t know which index Zakaria was referring to in Jakarta).

What’s remarkable about this portrait is that all of these economies seem to have followed the US into recessionary bear markets, peaking after the S&P and recovering before or as it recovered. This begs the question: did these and other emerging countries begin to recover because of their own, innate strength or because investors saw recovery on the horizon in the US and other developing markets?

I certainly don’t claim to have an answer to this question and, as Zakaria wisely points out, stock markets don’t tell the whole story. But it just goes to show that this whole debate is a lot deeper and more complicated than he makes it out to be in his column.

In the long run, though, he certainly has a point: China, Brazil, Indonesia and other emerging economies are certainly in a better fiscal shape than the US and Europe right now and are poised to grab a larger share of the world’s wealth and power in the coming decades.

But how they get there and who follows who is far less clear than the black-and-white tale of two worlds.

It is surreal to think that today marks George W. Bush’s last day in office. For most mid-twentysomethings like myself, he is the only U.S. president we’ve gotten to know as we came of age and formed our outlook on life, politics and . . . well, just about everything else.

For good reasons and bad, he became a target of much our (not to mention others’) discontent and it is not without reason that he is leaving office with a 22 percent approval rating.

But as the final appraisals pour in from friends and foes alike, much of the analysis misses the point. The US presidency is still, arguably, the most powerful post in the world. He or she who commands it has enormous potential to change the world.

In that sense, the true measure of a presidency is not what the person in power did accomplish, but rather, what he or she did not accomplish.

In many ways, that is the root of the nation’s disappointment with George W. Bush. He leaves behind so much unifnished business - whether it be finishing the mission in Iraq, stabilizing the economy, fixing social security, revamping U.S. immigration policy, capturing Bin Laden, among others - that there really is very little that the average American can celebrate. The rare exception is seven years without a terrorist attack on US soil, but to families who lost their loved ones in Iraq, even that must feel like a pyrrhic victory.

I think Pres. Bush understands as much. As he acknowledged in his final press conference (see below), the threat of terrorism, the mission in Iraq and the economic crisis are far from solved. Granted, he believes strongly that he made strong progress in all three. Pundits will debate this and historians will ultimately pass judgement on it, he says. But whether right or wrong, he wants us to know that he always acted decisively and with his best intentions in mind. Above all else, he feels he deserves credit for at least this much.

It is an explanation that reminded me a passage from Ernest Hemingway’s A Farewell to Arms. In the midst of the violence of the war in Iraq, I reached for this book in an effort to understand war better; not this war so much but rather war itself, from the eyes of a man who witnessed it and understood it well.

In chapter three, the protagonist, Lt. Henry, says the following to a priest who is disappointed by his actions - or rather - lack thereof:

That night at the mess I sat next to the priest and he was disappointed and suddenly hurt that I had not gone to the Abruzzi. He had written to his father that I was coming and they had made preparations. I myself felt as badly as he did and could not understand why I had not gone. It was what I had wanted to do and I tried to explain how one thing had led to another and finally he saw it and understood that I had really wanted to go and it was almost all right. I had drunk much wine and afterwards coffee and Strega and I explained, winefully, how we did not do the things we wanted to do; we never did such things.

Note the sincerity and simultaneous inadequacy of Lt. Henry’s plea to the priest. There is no doubt that he earnestly wishes things had turned out differently, but his explanation for his inaction ultimately turns into a hollow plea for sympathy: we did not do the things we wanted to do; we never did such things. The priest is not placated by the explanation; it is, at best, “almost all right.”

So too with Pres. Bush. It would be cruel to doubt the man’s sincerity. But when so many crucial tasks begun remain unfinished, the plea for sympathy in the form of always acting decisively and with conviction that he was doing the right thing is about as satisfying as knowing that we do not do the things we want to do; we never do such things.

The next president will not have the luxury of this explanation. “The question facing the president is not when the problem started, but what did you do about it when you recognized the problem?” asks Pres. Bush (12:40 in video below) in his last press conference. On day one, Pres. Elect Obama will have to deliver solutions to problems Pres. Bush could not solve.

Set aside the things he wants to accomplish; his will be the presidency of the things he needs to accomplish to get this country back on track.

Long after the final soldiers leave Iraq and US housing prices hit a bottom, historians will undoubtedly - with the benefit of hindsight - give George W. Bush higher marks than we do today.

But for the moment, it is easy to understand why his tenure seems, at best, “almost all right.”