The changing profile of global economy

Developing economies now account for about half of global growth. Thanks to a brisk recovery from the financial crisis, their import demand is growing twice as fast as that of advanced markets.

By (Reuters)

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Published: Tue 23 Nov 2010, 10:42 AM

Last updated: Mon 6 Apr 2015, 9:29 AM

In a powerful symbol of such shifts in the world economy, the manager of the euro zone’s financial rescue fund reckons he could quickly raise money to bail out Ireland — by turning to Asia.

“We are confident that we can raise the necessary funds from institutional investors, central banks and sovereign funds, in Asia in particular,” said Klaus Regling, chief executive of the European Financial Stability Facility.

So is it game over for the Old World?

Not so quick, argues George Magnus, senior economic adviser at UBS Investment Bank in London.

In ‘Uprising, Will Emerging Markets Shape or Shake the World Economy?’, Magnus cautions against writing off the West, especially the United States.

Given America’s proven capacity to reinvent itself, the epitaph RIP being prepared for it should perhaps stand for Renewal in Progress instead of Rest in Peace, he says.

And Japan’s precipitous decline since the end of the 1980s, when the land under the Imperial Palace in Tokyo was worth as much as the whole of California, is reason alone to question the “Sino-euphoria” generated by China’s seeming inexorable rise.

Magnus’s overarching argument is that China still lacks the organisations and institutions that accept — indeed welcome — the risk-taking that holds the key to technological innovation.

For it is technology that will be a major determinant of the fortunes and failure of developing countries over the next decades.

It’s one thing to manufacture an iPad. It’s another to invent, design, brand and commercialise it.

On this score, the United States and parts of Europe are likely to retain pole position for a long time, Magnus believes.

“China has proved itself quite adept at being able to introduce economic reforms, but I wonder whether it has the legal and political and social institutions to be able to encourage and tolerate disruptive change,” he said.

Technological Innovation

In raising questions about the durability of the rise of emerging markets, Magnus is swimming against a strong tide.

The Organisation for Economic Co-operation and Development, a club of 33 industrial democracies, forecasts in a new report that by 2030 non-OECD economies will account for 57 percent of global GDP, up from just 40 percent in 2000.

According to a recent book by World Bank economists who examined the post-crisis policy outlook, developing countries could overtake their developed peers collectively in size as soon as 2015.

“The countries of East Asia are leading the world out of its economic and financial crisis and may well become the new engine of global growth,” co-editors Otaviano Canuto and Marcelo Giugale write.

Whereas Magnus sees technological innovation as a potential weak spot, the World Bank sees four global trends unfolding that will enable emerging economies to raise productivity by harnessing better technologies:

· Less advanced countries are joining international supply chains, specialising initially in simple tasks;

· Booming South-South trade is diffusing technologies that have been tested and adapted to developing-country settings;

· Information and communications technology is getting cheaper and cheaper and more widely used;

· As the middle class flourishes in emerging countries, local technological adaptations begin to break even. The Nano car made by India’s Tata Motors for $2,000 is a case in point.

“As an engine of growth, the potential of technological learning is huge — and largely untapped,” Canuto and Giugale write.

Power or Mediocrity

Magnus agrees that, unless their governments make profound policy errors, emerging markets will probably continue the process of catching up with the developed world. And China should remain the dominant Asian power.

But nothing is pre-ordained.

While the ruling Communist Party is making the right noises about rebalancing China’s economy away from exports, Magnus says the present pace of change is too gradual for an impatient US government dogged by slow growth and high unemployment.

“I’m not saying at all that China’s leaders don’t ‘get it’. But I have serious reservations as to whether the scale of change required from a global perspective is something the leadership is willing to embrace,” he said in the interview.

Futurologists, he says, must ask whether an autocratic China with weak legal institutions can avoid a clash between accelerating economic development and rising demands for commercial and political freedoms.

“It could be that nothing less than this will determine whether, in the longer run, China will continue to develop as an economic power or succumb to mediocrity,” Magnus writes.

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