A profound change is underway in the world economy. The balance of economic and financial power is shifting from the West to the East. This shift could usher in a super-cycle of strong, sustained growth for those economies best-positioned to succeed. The successful countries will be those with financial clout or natural resources, or with the ability to adapt and change with the times.
The current crisis, triggered by a systemic failure of the financial system in the West and by an imbalanced world economy, is a sign of this global shift. Savings flowed “uphill” from regions running current account surpluses, such as the Middle East and Asia, to deficit countries like the US, Spain, and the UK.
Some blame the savers, not just the borrowers. This is harsh. The countries that provided the savings to fuel the global boom were not the problem, but are part of the solution. The 1944 Bretton Woods agreement, which has driven thinking since, placed no obligations on savers to correct global imbalances. The onus was put on countries with deficits to take corrective action. This has to change. A more balanced global economy is needed.
The West should spend less and save more, while the Middle East and Asia should do the reverse. Achieving this will take years, and the implications are huge. The West will become relatively poorer. Money and savings will flow eastward as multinationals and pension funds invest in markets with higher growth and rising incomes. Asia will need to change its growth model and boost domestic demand.
At this year’s Asian Development Bank meeting in Bali, there was a determination to put steps in motion to achieve this, with a focus on social safety nets to discourage saving for a rainy day. Asia also needs to deepen and broaden its capital markets to allow firms to raise funds, invest, and generate jobs. Over the next decade, Asia needs 750 million extra jobs for its young, growing population. Achieving this would create a huge market for the West to sell into, but at the price of greater global competition.
In recent years, the pace and scale of change on the ground in economies as diverse as Brazil, Vietnam, and China have been profound. Furthermore, the catch-up potential of these and others, such as India and Indonesia, is huge. Despite the crisis, the infrastructure boom seen in the Middle East continues, particularly in Saudi Arabia and Qatar. Emerging countries are accounting for an increasing share of global growth.
Although the change is widespread, it is China and India that naturally attract attention.
China is still a poor country with huge imbalances, yet its rise over the last three decades has been phenomenal. Now, China is heading into a new development phase, building its infrastructure to compete at every level. China’s US$586 billion stimulus package over this year and next is supplemented by two profound measures — one aimed at building a social safety net, and the other at helping farmers to buy consumer goods. As a result, this year alone, the increase in Chinese consumer spending may make up for more than half the shortfall in US consumption.
China’s growth is forcing others to step up a gear, too. India’s general election this summer saw the government re-elected with a larger majority that could usher in a period of reform, boosting investment and innovation. With 600 million people aged under 25, the potential for India, if it gets this right, is huge.
RSS