The New Global Economy is Emerging

Economic growth is the foundation for growing living standards. Since the second world war, the US has been the principle driver of global productivity growth. Its wealth and capacity has enabled it to grow fairly consistently and be a source of finance to stimulate production in other western countries. As a strong proponent of free trade, it has stimulated economic growth in western industrial nations (eg. European Union, Japan and the Asian tigers) over the past 30 or so years.

On this basis, with the US heading for recession, a deflating dollar against many major currencies, growing unemployment and the risk of oil driven inflation, many commentators have been suggesting that this could cause a slowdown in western industrial economic growth. Many are assuming that the US will recover and reclaim its space as the motor behind the global economy. But the structure of the global economy is changing. The US has caught the flue, Japan and the EU might get a dose as well, yet the new emerging economic powers just seem to have a slight sniffle. The the new global economic order is upon us and it might just change the balance of global wealth and economic power.

Over the past 10 or so years, the free market has overtaken Marxist economics in all but a few of the old communist states, and has been followed by the formation of massive new cooperative economic regions designed to stimulate enterprise and growth. The emerging Asian nations are a strong trading bloc. Many of the old USSR states have formed the Confederate of Independent States. Outside of this you have oil rich and influential Middle Eastern nations and the less developed African sector (also oil rich in some cases). Most of Western Europe and the UK are progressively increasing their economic affiliation through the EU, progressively joined by the old communist Eastern bloc countries. Outside of this you have the industrial countries such as resource rich Australia and South Africa, and those most closely tied (financially and trade based) to the US – the Asian Tigers (post WW II developed, Japan, Singapore, Korea etc) South America and Canada.

The European Union, China and India are each significantly greater populations than the US while the Confederation of Independent States (old USSR states) is pretty much the same size. Economically, all bar the EU are starting behind the eight ball, lacking not just the US culture of entrepreneurship, innovation and production efficiency but in many cases, the institutions and regulatory regimes that support business and finance in modern western economies (not to mention as well, political uncertainty and cultural upheaval). But many have other advantages, in addition to large internal demand for goods and services, they have large populations of young workers (excepting China), relatively low labor costs, improving education and an increasing thirst for wealth. In some regions, the absence of property rights also provides the opportunity to produce goods without the cost of innovation and development.

With the US economy almost in recession following six years of unsustainable credit driven growth (expected GDP Growth of 0.9% in 2008 and 0.7% in 2009 (European Commission Economic Report Spring 2008) ). By comparison expected growth for emerging Asia, excluding Japan, is around 7% over this and the next years. China’s expect growth is around 10% (revised down from 11+%) reflecting the massive growth in infrastructure and (less profitable) production investment and its rising domestic consumption.

Emerging Asia contributes around 34 per cent of world export trade of which 40 per cent is trade within its sector, of which involves the production of goods for export to industrial countries (IMF) . Internal consumption, infra-structure development and communal trade are likely to protect China and the region to an extent from the western slowdown, although the effect of US recession on exports and strengthening US financial links is uncertain. Emerging Asia’s other main player, India has a growth rate of around 8% propelled by a large generation Y population, increasing education and low labor costs.

The Confederation of Independent States (the old USSR also has a collective strategy to increase trade and finance. These are a really interesting group whose future growth rate is somewhat uncertain. However, growth rates are increasing – Russia was around 8% in 2007 with Gross Domestic Production (GDP) equal to about 16% of the EU. Although inflation is high, growth is expected to remain strong over the next couple of years.

Meanwhile, the European Union continues to focus on collective economic and financial sustainability (expected GDP growth 2.0% and 1.8%). The Union strategy is to reduce costs, increase competition and increase self sufficiency through coordinated economic policy – harmonizing product standards, labor market flexibility and reducing trade bureaucracy and anti-competitive practice. With a population of almost half a billion it is the largest single international market, bigger than the US and Japan combined. It has the capacity to become increasingly self-sufficient and globally influential, subject to the extent of harmony it can achieve in the future and labor costs rising in emerging countries.

As China, India and th CIS grow over the next decade its likely they will continue to contribute more and more to global wealth. As their standard of living increases, predictably so will their labor costs. Business culture will no doubt change in places like the CIS and China. For example as private wealth increases people and companies will want to protect their assets and property rights. Market and regulatory structures will mature, innovation and entrepreneurship will gradually replace dependence on the central guidance. Most significantly, their wealth will enable them to contribute more and more to foreign investment and in turn their level of influence over the global economy.

The first big question is how long this will take. Changes to a countries fundamental social and economic structures often take generations to evolve, and is quicker in countries with higher education levels. It may take some time but the trains are accelerating.

The second question is. as it happens, what will it look like? It will be a great irony, but for the US – who has fought so hard for the free economy – it may involve a somewhat diminished role in a future world dominated by the billion plus populations of Chinese and Indian free market entrepreneurs and the various other regional communal trade sectors.

I have a hunch that the next 40 years will take the global economy on a journey vastly different from the last 40 years.