A Precarious Balance

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Such resilience highlights the degree to which the structure of the world's economy has been profoundly reshaped by globalization. The increasingly free flow of goods and capital has brought about greater integration of national economies, while at the same time broadly dispersing economic power. The old industrialized-world triad of the U.S., Japan and Western Europe no longer dominates to the degree it once did. China is close to snatching the No. 3 slot on the list of the world's biggest economies away from Germany, while India and South Korea are set to join the top 10 within a decade. India's GDP has expanded by a total of $350 billion over the past six years, an amount equivalent to the entire economy of the Netherlands in 2000. Once moribund countries such as Argentina and Russia are booming, too. Indeed, developing economies are doing much of the heavy lifting today. According to the World Bank, they collectively grew about 7% last year—more than twice as fast as high-income countries—and developing nations now account for 49% of world economic output, up from 39% in 1990. "For the first time in many decades, the global economy enjoys multiple sources of economic growth, of which the U.S. is not the most important," says Gail Fosler, chief economist at the Conference Board, a business-research outfit in New York.

Still, even the biggest optimists concede that nobody would escape unscathed if the U.S. economy were to hit a wall. Its immediate neighbors, Mexico and Canada, would probably be hurt the most as they are particularly dependent on trade with the U.S., but the reverberations would be felt worldwide. The key bone of contention is the extent of the suffering. Those who dispute the decoupling theory point to the seemingly insatiable appetite of American consumers for imported goods, which has been a critical driver of the world's economic expansion. There are still relatively few signs that German, Japanese or Chinese consumers are ready to step up to replace them. For example, while China's imports are way up, those gains are due less to a free-spending middle class than to increasing demand for raw materials and components to feed the country's manufacturing sector, which turns the material into a mountain of finished products to ship to the U.S. "If you just look at the numbers, it looks like Asia's exports to China are larger than they are to the U.S.," says Rob Subbaraman, senior Asia economist for Lehman Brothers in Hong Kong. "But people aren't taking into account where the end demand is coming from." Stephen Roach, Morgan Stanley's chief economist and one of the most skeptical observers of the world economy, has long warned about the dangers of flagging U.S. demand. "The rest of the world doesn't have enough vigor in its private consumption" to offset U.S. declines, he says. Now he's concerned, too, about signs he sees of a possible Chinese slowdown, including a steep drop in the growth of investment spending and reduced gains in industrial output. A less dynamic China is one reason Roach thinks global growth this year will be "significantly below what most are expecting."

Others argue that the global economy is now better able to withstand potential shocks such as slower Chinese growth because it's more flexible and healthier, and because interest rates around the globe are relatively low. Kenneth Rogoff, a Harvard professor and former chief economist at the IMF, believes Asia is not immune to a sharp U.S. slowdown, although he says Europe may be better insulated because of its big internal market, which now covers 490 million people. But he also points out that, until the early 1990s, Japan was a vital source of global growth that virtually disappeared during the country's prolonged economic slump. "It turned out to be no big deal because the world adapted," Rogoff says. "If U.S. growth falls to 1% and stays there for three years, it would be painful at first, but over time others would adapt to that, too."

Certainly, there's less nervousness in financial markets today about the risks of instability in one country spreading elsewhere, as the example of Thailand suggests. The country became the epicenter of the 1997 Asian financial crisis when its currency plunged and set off a chain reaction that hurt emerging markets from Russia to Vietnam. Nearly a decade later, Thailand last month risked triggering a similar meltdown when the country's central bank imposed capital controls in an attempt to curb a big appreciation of the national currency, the baht. Coming just three months after a military junta seized power, the move spooked foreign investors and sent Thai stocks plunging nearly 15% in a day before the government partially reversed itself. Yet there was no regional domino effect. Some Asian markets dipped in reaction to the Thai scare, but they quickly rebounded. What has changed? Among other factors, Asian governments today have far more balanced accounts, higher foreign-exchange reserves and less debt, while the region's corporations are now better financed. "There was no worry of contagion," says Sukhbir Khanijoh, senior securities analyst for Kasikorn Securities in Bangkok. "In 1997, the whole region was suffering from problematic economic fundamentals. This time, the crisis was only in Thailand. It was a crisis we created ourselves and that we had to solve ourselves."

Many dangers to the world economy are still lurking, of course. Oil prices have dropped back recently from $70 to the low $50s, but they are still far higher than just a few years ago, and other commodity prices have soared, fueling inflation. Business leaders across the world are also watching nervously for signs of a protectionist blast from the new Democratic-majority Congress in Washington. Isolated cases of protectionism abound on both sides of the Atlantic: in December, the U.S. Department of Transportation turned down an application by Virgin America, a start-up airline partly owned by British billionaire Richard Branson, to begin domestic U.S. flights because of the carrier's foreign ownership. In Europe, meanwhile, the French government proudly touts its doctrine of "economic patriotism" and has tried, with mixed success, to engineer domestic mergers in the drugs and energy sectors to ward off foreign takeovers.