Tuesday, February 13, 2007


Shifting Gears: The Increasing Power Of The Emerging World

Examining the change of the world's economic power structure.

Globalization - unquestionably a democratic concept that puts all mankind on the same platform.

In Economics there is a special sentence to describe this process of equalization, referred to by politicians as ‘globalization': economists call it ‘Democratization of Wealth'. The democratization of wealth among nations is theoretically almost a perfect concept, save and except for only one drawback: as poorer countries are getting richer, richer countries are getting poorer.

Economics and politics have been always integrated, dependent and intertwined with one another, but whereas politics - and politicians - focus on momentum and balance of power in hopes of writing history for posterity, economists provide the backbeat. Economics does not determine history per se, but it does provide the environment for politicians to move around and, thus, write history - or trying to.

Let me make an example. Only a short fifteen years ago or so the world looked much, much different. The political landscape consisted of two powerful, monolithic assemblies of nations: us - the ‘Free World' - and them - the ‘Communist Bloc'. The United States and Western Europe formed the bulk of the countries of the Free World while Soviet Russia, Eastern Europe and Maoist China formed the bulk of the Communist Bloc. As to the remainder of the countries, which did not belong neither to the Free World nor to the Communist Bloc, they were collectively referred to as the Third World. If Western strategists during the Cold War era can be found guilty of something, it is that they probably spent too much time worrying about the Soviet Union's military clout and too little time analysing its economic frailties. But it was economics, not politics, which ultimately brought the soviet bear down to its knees.

And another lesson that politicians never seem to learn, is that history - far from being new and exclusive - invariably repeats itself. For instance, until the mid-19th century China and India were the world's biggest economies. Then the West, through technological prowess, spirit of freedom and sound economic principles took a giant leap ahead. But today we are assisting at the restoration of the old order.

The emerging world already accounts for over half of global economic output measured in purchasing-power parity, which allows for lower prices in poorer countries. And, moreover, a barrage of statistics shows that economic power is shifting away from the ‘developed' economies - such as North America, the Euro Zone, Japan and Australasia - towards emerging ones, especially in Asia. Developing countries chew up over half of the world's energy and hold most of its foreign-exchange reserves. China has amassed more than USD 450 billion in foreign-exchange reserves and India too has seen a marked rise in international reserves, to roughly USD 200 billion.

The share of exports of the emerging economy has grown exponentially from twenty percent in 1970 to forty-five percent today. And although Africa still lags behind, the growth is fairly broadly spread. They may be the most talked about, but according to the World Economic Council Brazil, Russia, India and China account for only two-fifths of emerging world's output.

Clearly, no social or economic change of such an enormous size can take place without friction, and perhaps the most evident and ominous sign of it is the uproar about jobs being ‘outsourced' to India, China and, to a lesser extent, Mexico and South America. Not surprisingly, many perceive the growing competition especially from China and India as a significant threat. And some are wondering how anyone can compete against countries that have such huge pools of cheap labour and, at the same time, access to the latest technologies.

It was a combination of demand for inexpensive products and domestic competition that has spurred companies to open subsidiaries to produce goods and services in China and India, so as to take advantage of an almost inexhaustible pool of cheap human resources. Outsourcing, however, from a strict economic perspective is not an entirely negative phenomenon. Robust economic growth in Asia, which is lifting hundreds of millions of people out of poverty, is creating more demand for goods and services from the industrialized countries, thus providing a much-needed boost to global economic growth. Indeed, preliminary data suggest that China has vaulted into third place among the world's most important importers, behind only the United States and Germany. Globalization is not a zero sum game: Mexicans, Indians and Brazilians and Chinese are not growing at the expenses of Americans, German, Japanese and the British.

There are, furthermore, wider ramifications of a political nature as well. For one thing, China's rise has helped push India and even Japan closer to the sphere of influence of the United States, and South Korea farther away from it. Likewise the West, as well as hundreds of millions of people in the developing countries, has benefited and continues to benefit from the growth of the emerging world. Besides political alliances, as consumers of the emerging countries get richer they will become more educated and their societies more stable. In a way, democratization of wealth is also democratization of societies, and perhaps the greatest contribution to the annihilation of those few tyrannical political systems that still pervade the planet and enslave their own people into submission.

The world is on course for its fastest ever decade of growth in GDP per capita, which has been powering ahead at an annual rate of 3.2 percent since the onset of the millennium - one of the most accelerated ever in the political and economic history of humanity. Let us only hope that our great leaders and politicians of all colors be wise enough to appreciate the fact that a world in which most people enjoy prosperity and opportunity is surely better than one in which eighty percent of them are mired in economic stagnation.

And let us further hope that our great leaders and politicians - and indeed the leaders and politicians of all nations - may come to terms with the ultimate truth that cooperation and dialogue, not confrontation and war, are the solutions to mankind afflictions.

Luigi Frascati


Real Estate Chronicle


Great Article. A uncommon analysis.
Thank you, Bart.
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