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Javier Santiso in an article originally written for Credit Suisse (NYSE:CS) explores the impacts of the recent financial market turmoil and shows how the impetus is shifting to developing economies.

A shift in the distribution of global economic power and wealth has overturned perceptions of what a downturn in the US economy means for the rest of the world. A decade ago, all regions would have felt a severe blow.

But today, emerging markets such as Latin America, while not immune from the effects, are softening the impact by bolstering their ties with China and the world's other rising economic powerhouses.

Ten years ago, faced with a US downturn, the economies of Latin America would have toppled like dominoes, no questions asked. Today however, they are still dancing and living the vida loca as the USA sinks.

Following in Asia's footsteps, Latin America is supposedly now decoupled, free to continue the fiesta whether the USA joins the party or not.

Shifting of Balance

In fact, something else altogether is happening – a tectonic shift so fundamental that the term "decoupling" does it little justice. It is a major rebalancing of the wealth of nations. Decoupling belongs to a world that is disappearing, where supposedly a Periphery decouples from a Center. The problem is that the Center is less and less the Center and the Periphery less and less the Periphery.

OECD countries, which five decades ago accounted for 75 percent of world GDP, today account for less than 55 percent. The US stock market accounts for 35 percent, and falling, of world market capitalization, compared to 50 percent just 10 years ago. In 2007, the share of foreign direct investment from OECD countries decreased to 85 percent, while it represented nearly 100 percent in 1970.

Brazil Becoming Global Player

Classifications like "OECD" or "emerging countries" have grown to reflect historical baggage rather than economic realities: Mexico, South Korea and Turkey, three leading emerging markets, are already OECD members, while others, such as Chile or Russia, are on accession track. The same that applies for nations is true for corporations.

Just to name some few Latin examples, a company like InBev, born from the merger of Belgian and Brazilian brewers, is already an exotic-bird representative of these new global emerging corporations: difficult to classify in either emerging market or OECD asset class. Cemex, the Mexican cement giant, is still headquartered in Monterrey, but its strategic, financial and economic research centers are located in Spain.

The profile of the Brazilian mining conglomerate Vale has already changed with the acquisition of Inco from Canada. Brazil is growing into a global trader, reaching into exotic markets like the Middle East, Africa or South East Asia. Companies like Vale, Petrobras and Odebrecht are actively entering African markets, while Embraer and Marcopolo are becoming big players in China.

Mexico Still Strongly Dependent

These emerging global "multilatinas", with headquarters in Latin America, are following in the footsteps of companies based in, for example, India, China, Russia and South Africa.

It is ironic to see a company like Tata emerging from India to buy the jewels of the Old Empire, Corus and Jaguar. The Periphery is entering massively into the Center. All this does not mean that Latin America is immune to a hit from the US downturn.

Mexico is clearly in the line of fire: its GDP growth is highly correlated with US industrial activity and nearly 85 percent of its exports go to the USA, compared to 40 percent, on average, for Latin America as a whole. Exports to the USA accounted for 27 percent of Mexico's GDP in 2007, compared to less than 3 percent of GDP for Brazil, 8 percent for China, 4 percent for India and a meager 1 percent for Russia.

Other, US export-oriented states of Central America are similarly exposed. Remittances, that accounted for USD 24 billion last year, are already slowing (they declined by 2.6 percent during January – May 2008, compared to the same period last year).

Another channel of shock transmission is the banking sector: 85 percent of Mexico's banking assets are held by foreigners (including Citibank), compared to less than 30 percent in Brazil. Nevertheless, Mexico remains macroeconomically in much better shape to weather the US storm than it was a decade ago. Fiscal and current accounts are sounder, debt is low, inflation is contained and high oil revenues boosted investment by an astonishing 50 percent in 2007.

China Becoming Central Factor

For other Latin American countries, the situation is somewhat different. Fiscal and monetary anchoring is, like in Mexico, also stronger but, above all, the USA is no longer the only exogenous growth engine: for the first time Latin America is benefiting not from one or two exogenous growth drivers but three. Till the eighties, the bulk of exogenous growth was coming from US trade, followed in the nineties by massive foreign direct inflows from Europe.

In the 2000s, as underlined in the just released OECD Latin American Economic Outlook, the major event has been the emergence of a third exogenous pillar of growth: Asia.

The trillion-dollar question for 2008 and beyond is therefore no longer what will happen with the USA, but what will happen with China. If China resists the US heat, commodity markets might be resilient enough to ensure Latin American countries are not dragged down into the hole. Barely a decade ago, any suggestion of Latin America escaping the United States' gravitational pull would have been ridiculed. For the first time, a sharp downturn in Far East Asia could be of greater concern to Latin America than a bursting US bubble.

Strengthening of South-South Axis

Rebalancing the wealth of nations has triggered the emerging trend of growing south-south linkages, as the Peripheries increasingly become Centers of the world economy. In 2007, for the first time ever, emerging market exports to China surpassed those to the USA (15 percent of the total).

In turn, in 2006, China became more exposed to emerging economies than to the wealthy G7 countries: in the early 2000s, exports to G7 countries accounted for nearly 50 percent of the total; since then they have been falling toward 40 percent, while exports to emerging markets have been on the rise. Half of Chinese exports are now going to emerging countries. In Latin America, Chile is already exporting 36 percent of its products to Asia, with China alone accounting for a stunning 15 percent of total exports.

At the Start of a New Era

Latin America, like other emerging markets, will probably not avoid the storm clouds from the North. But their reality is incomparably different from a decade ago. A major "de-centering" of the world is underway and, for Latin America, this means that the equation also includes China, as well as the USA.

The old paradigms through which we are used to understanding Latin America – to which decoupling theories belong – need to be deeply reassessed. We are just entering a new era that looks increasingly Asian, Russian – and Latin American.