In general terms, decoupling is the separation of formerly related elements that usually increase and decrease together. It is used extensively in many disciplines such as science, technology, mathematics, organizational management, etc. In economics, it is a general and controversial term for many economists due to the difference position embraced by economists about its nature most especially during this time of globalization.
To understand decoupling, one good example to consider is the rise or fall relationship of corporate stocks and bonds. Normally, corporate stock and bond returns rise and fall together; however, the moment the return of stocks increases while the return of bonds decreases; this could be a case of decoupling. There is another example that can enlighten the concept. Usually, increases in economic production go hand in hand with the destruction of environment. However, the moment the economy poses continuous economic growth without the destruction of the environment; it is possible to state that the economy and environment are decoupled with each other.
In terms of investment risk, many economists argue that there is a relationship between the decoupling of an economy to another economy. Nevertheless, it is important to note that being decoupled does not produce the same quality of results in terms of investment risks. In other words, being decoupled does not always lower a country’s investment risk. It will always depend on what country is being questioned.
The case of being decoupled to United States will prove the point that decoupling reduces investment risks. The case of decoupled countries (United States) such as United Arab Emirates, China, Malaysia, Iran and even North Korea had somehow immunized them from the effects of the 2008 crisis that started in the United States. Other countries that are more integrated to the economy of the United States experienced higher investment risks and economic downturns.
The reason for the decrease in investment risk from decoupling is simple. Being integrated or not decoupled to a delicate economy such as the United States (at least during the 2008 crisis) will affect extensively the production and the overall economic growth of that country. Since the overall demand for trade will decrease, the overall production will also go along with it. Moreover, being decoupled to a huge economy such as the US will translate to the necessity of huge domestic spending; a very good fuel for economic growth. There is also a possibility that during decoupling from a large economy, trades and deals with other smaller countries will increase. These situations and conditions of the decoupled economy decreases its overall exposure from investment risks since its eggs are not put in one big basket.
The Economist. (2008). The decoupling debate. Retrieved February 10, 2011 from http://www.economist.com/node/10809267?story_id=10809267
Kennedy, Simon. (2010). Wall Street Sees World Economy Decoupling From U.S. Retrieved February 10, 2011 from http://www.bloomberg.com/news/2010-10-03/world-economy-decoupling-from-u-s-in-slowdown-returns-as-wall-street-view.html