Although the emerging economies are currently experiencing boom, how far they can remain immune to the effects of the crisis that has unsettled the financial markets in the United States and is spreading to Europe is hard to predict.

Many analysts are of the opinion that this crisis has a global dimension and if it persists it can lead to global recession and thus, in many ways, affect the emerging economies and also the developing countries.

The 2008 UNCTAD report says that uncertainty and instability in international financial, currency and commodity markets are contributing to a gloomy outlook for the world economy and could present considerable risks for the developing world which remains highly vulnerable to commodity price fluctuations.

However, it will largely depend on how governments in these countries manage their economies and take measures to neutralise the possible risks. At the moment, the big winners are in Asia, where corporations have kept debt in check and banks have largely shunned the risky mortgage-backed paper from the US. A decade ago, East Asian economies were in ruins hit by the currency crisis and the US was swimming in liquidity. Today, in a reversal of fortunes, US economy is in deep trouble and Asia is awash in dollars.

Asian governments today boast of having $2.6 trillion in foreign assets available for investment. The Gulf states have hundreds of billions in foreign banks and equities. Russia and Brazil have hefty reserves and trade surpluses. Sovereign wealth funds such as China Investment Corporation and Singapore’s Temasek can still buy stakes in US companies at bargain rates once the dust settles down.

However, too much foreign cash in China has led to stock speculation and over-investment. If a US slowdown hits China’s exporters, its nearly $2 trillion in foreign assets leaves plenty of leeway to expand credit. Brad Setser of Council on Foreign Relations estimates that foreign assets in Chinese institutions have swelled by $700 billion just this year. This gives them enormous freedom to stimulate the economy.

Bit it is a different story in case of Russia. Its stock exchanges in recent days have plunged as an instant reaction to any tumble in Wall Street markets. Despite $432 billion in foreign exchange reserves, Russia is in financial difficulties due to capital flight and weak banks.

Kuwait and the United Arab Emirates are also struggling to contain inflation and property bubbles. Since the emerging markets are too small to absorb much investment, the bulk of their wealth will likely keep flowing to US treasury bills, including those floated to fix the US financial mess, according to BusinessWeek.

Asia has another problem. Slower economic growth, already being felt in North America, Europe and Japan, will lead to less exports of manufactured products, mainly by China and other Asian countries. China’s domestic demand will not be enough to compensate for the drop in external demand. The slowdown of economic activity in the industrialised countries, China and other Asian countries such as Malaysia, Thailand and South Korea, with a high consumption of raw materials, should eventually bring down the price of hydrocarbons (oil and gas) and other raw materials.

However, over the years the world’s dependence on the US as a destination for exports is on decline, according to a report of rating agency Moody’s. From 2001 to 2006, the share of exports headed to the US from major economic regions, except China, declined. Growth in intra-regional trade has reduced most economies’ direct and indirect trade exposure to the United States.

As the weight of the US and Europe in the global economy has moved downward, the four emerging economies called BRIC (Brazil, Russia, India and China), with their large land mass and population, have been the big gainer. The trend of protectionism in the West may slow it but cannot reverse the process because the global trading is much more diversified today than ever before. The report says that the rise of BRIC in the global trading regime is a fundamental and lasting structural shift in the global economy.

This shift brings into focus the rise of China and India. China has replaced the US as the biggest trading partner of almost all Asian countries, including Asean, South Korea and Japan. At the current rate, China will replace the US as India’s largest trading partner by the end of the decade, says the Moody’s report.

Meanwhile, the current financial turmoil in the United States and some countries of Europe has left emerging economies largely untouched, since the financial institutions in these countries are very small participants in global markets. Foreign assets in these countries are held primarily by their governments, and these assets are usually low-risk sovereign bills and bonds or high-quality corporate securities and bonds. The amount of assets held by emerging economies in collateralised debt obligations is small.

Still, the emerging economies cannot be assumed to be completely immune. The housing and mortgage credit meltdown in the US has changed risk perception. Investors are much more careful when evaluating products, and this is having an impact on investment in debt-based securities in emerging markets. As long as the turmoil remains confined to the financial markets, its impact on emerging economies will be marginal at most. But if trouble spreads to the real economy, either in the US or Europe, then emerging markets will feel the pain. And, it is important to note, the global real economy has already moved away from an overwhelming dependence on the US as the main driver of growth.

What has happened over the years is that BRIC’s rapid growth has begun shifting the centre of gravity of the real economy away from the US. And more this shifting takes place, it will leave the global economy less vulnerable to changes in the US economy. But since the decoupling is yet far from complete, the global economy is still influenced by the developments in the United States. The US economy is largest and hence carries a large weight globally even though the BRIC states have begun calling the shots.

The major milestone in decoupling will take effect when India and China move to capital account convertibility and a floating exchange rate and integrate their financial sectors with the global financial system. That day is still far away. The two Asian giants have to strengthen and deepen their financial markets. That will require major reforms and could be a long, drawn-out process. The real change will not come as long as the dollar remains the main trading and reserve currency while the global economy remains vulnerable to policy measures of America’s Federal Reserve Bank.