The financial crisis of the past two years will provide the catalyst for a profound change in the global economy — which, according to the man running the World Bank, will see China and India become established centers of power, the dollar eclipsed as the sole reserve currency, and Latin America, Southeast Asia and Africa emerge as new sources of growth.
But as he surveys the wreckage caused by what the bank and its sister organization, the IMF, agree is the most severe crisis since the devastation caused by World War II, Robert Zoellick is surprisingly upbeat about the future.
Asked by this reporter how he envisages the global economy in 20 years’ time, Zoellick says: “There will certainly be a larger role for the emerging powers, there will be multipolar sources of growth, there will be more south-south trade between developing countries.”
“The crisis gives us the opportunity to hasten this process. If we are concerned about the past reliance for growth on the US consumer, we have to make sure consumers in developing countries have enough finance to buy,” he said.
Zoellick says that, while this does not mean the end of the US as a big player on the world stage, it has brought the curtain down on the unipolar world that followed the collapse of communism 20 years ago.
Developing countries were on the rise before the credit crunch and, as the latest snapshot of the global economy released last week illustrates, their position has been strengthened by their ability to keep growing as the west teetered on the brink of a 1930s-style Depression.
“We have reached a tipping point in global economic affairs,” says Stephen King, chief economist of HSBC. “While there are some encouraging signs of recovery in the developed world, the real economic action is taking place elsewhere. For both cyclical and structural reasons, the emerging nations are set to dominate world economic activity in the years ahead.”
The US, Zoellick says, can no longer rely on the dollar ruling the roost. The euro and the Chinese yuan are candidates to become reserve currencies.
Tellingly, this year’s annual meetings of the Bank and Fund take place in Istanbul, the point where Europe meets Asia and for almost two millennia a melting pot for cultures and religions. The view of both Zoellick and Dominique Strauss-Kahn, managing director of the IMF, is that there is a discernible shift in power and influence eastwards.
“These annual meetings take place at a defining moment in global governance,” Strauss-Kahn says. “We have experienced unparalleled economic co-operation in the last 12 months. It has never happened in history.”
While noting that there is a risk of the consensus vanishing now the immediate threat of economic meltdown has receded, Strauss-Kahn says it is the will of world leaders to continue collaborating in the years ahead. The days of the G7 — an elite gathering of policymakers from the US, Britain, Japan, Germany, France, Italy and Canada — are over. Power has shifted to the G20, which includes the G7 plus a number of leading developing countries such as China, India, Mexico, Brazil and South Africa.
John Hawksworth, head of macro-economics at PricewaterhouseCoopers (PwC) in the UK, says political influence will result from the increased economic clout of the big developing countries. Within two decades, he says, China may have overtaken the US as the world’s biggest economy.
“The E7 [Emerging Seven] — China, India, Brazil, Russia, Turkey, Indonesia and Mexico — could be a lot bigger than the current G7,” he adds.
PwC estimates that the global economy will double in size by the end of the 2020s to US$143 trillion at today’s prices, with the E7 accounting for almost 40 percent of GDP and the G7 30 percent.
“The E7 is already not that far behind the G7 and that process has been accelerated by the current crisis, which has hit the developed world harder than the big emerging economies,” Hawksworth says.
Like Zoellick, he thinks the dollar will no longer be the dominant currency.
“The dollar, the euro and the renminbi will form a basket of currencies. The world will be different. The recession has accelerated that process,” Hawksworth says.
The IMF and the World Bank are still set in their original mould, he says.
“Voting shares are going to have to change and it will be a gradual process. But it is possible that there will be a Chinese head of the fund or bank by that time,” Hawksworth says.
Such an outcome would symbolize the changing of the guard. There has been a gentlemen’s agreement that the head of the World Bank should be chosen by the Americans, the single biggest shareholder in the two institutions, while the managing director of the fund is picked by the Europeans. Zoellick is a former US trade representative; Strauss-Kahn was once France’s finance minister.
“There is an inevitability about this [shift in power to Asia],” Hawksworth says. “You can already see it in the business world, as witnessed by the HSBC decision. The center of economic gravity is shifting and will continue to shift.”
Zoellick says the spread of prosperity to the poor parts of Asia, Latin America and Africa will be accelerated by investment in infrastructure, social safety nets and manufacturing.
Critics say the bank and the fund have too rosy a view of the future. One threat, recognized by the IMF, is that the 3.1 percent growth pencilled in for next year following the first year of global economic contraction since 1945 will prove a false dawn. Once the artificial stimulus of public borrowing wears off, the fear is that a rationing of credit by enfeebled banks will prevent the private sector from taking up the baton.
Another issue is the willingness of the old world to cede power. The IMF and World Bank were set up at the Bretton Woods conference in 1944 and their governance still reflects the dynamics of the 1940s. Reforms are being undertaken, but they are neither radical nor rapid enough to satisfy campaigners.
Finally, there are those who believe the determination of the bank and fund to return as quickly as possible to the high levels of growth seen earlier this decade ignores the elephant in the room — that, by 2029, traditional fossil fuel stocks will be running dry.
Andrew Simms, head of policy at the New Economics Foundation think tank, says: “One major thing that will describe the landscape in 2029 is that we will be beyond the point of peak oil. That will be the trigger for so many dominoes to fall.”
Decisions made in the next few years, he adds, will be critical.
“There is the risk of enormous knock-on effects on trade and food supply, with the food price volatility of the last year looking like a vicar’s tea party,” he says.
He believes food security will replace GDP as the yardstick of success, and there will be an emphasis on the new “three Rs” — reduce, repair, recycle.
In one respect, Zoellick, Strauss-Kahn and Simms are in full agreement: decisions taken in the next two or three years will shape the next two or three decades.
“We are balanced on a knife edge,” Simms says. “The potentialities are wonderful; the probabilities deeply disturbing.”
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