See the Asian tail wag the Western dog
Sunday 16 November 1997
These resulted from testimony that Alan Greenspan, head of the US Federal Reserve Board and Larry Summers, deputy secretary as the US Treasury, were giving to Congress. What they actually said was unremarkable - essentially that there was a significant regional problem but that its direct effect on the US, so far at least, was modest. What was interesting, though, was that they are being quizzed on this at all and that it should be this issue that would be seized on by the wire services as the one to rush out. Five years back the markets might have been worrying about inflation or unemployment; now the new fear in the US markets is the danger of contagion from East Asia.
For we seem to be seeing for the first time since at least the Second World War, maybe longer, the developing country tail wagging the developed country dog. We are not used to this. Go back earlier and events outside of North America and Europe had a profound impact on the markets and economies here. But during the last 50 years the only truly seismic shock that has been inflicted by developing countries on the developed world came from the hikes in the oil price in the early and late 1970s. The Latin American banking crisis in the 1980s was alarming for the western banks but it did not do deep and lasting damage to western economies.
Now it may well be that this East Asian financial crisis is simply a re-run of the Latin American one, on a similar scale but with the emphasis on share markets rather than bank debt: disagreeable but not catastrophic. I think the evidence still points to the turmoil resulting in a regional slow-down, rather than a global one. But the danger of contagion looks greater by the day, as the markets are coming to recognise.
The damage the East Asian crisis might inflict on the world economy is discussed by George Magnus, chief economist at UBS in London, in a paper out next week on the big D-word - the dangers of global deflation. He believes that global growth will fall to 3.3 per cent, against a forecast at the beginning of this year of 4.2 per cent. That is not quite the same as saying the East Asian crisis has knocked 1 per cent off global growth; but the crisis is clearly the most important single factor in the downgrade.
Ten years ago it would have seemed odd for the London market to respond to a movement in Hong Kong; what mattered was Wall Street. Now Wall Street still matters most, but the East Asian markets, in particular Hong Kong, to some extent even set the tone for Wall Street. That is something that European markets have hardly ever done.
Why? I think it is principally because East Asia is a much more important part of the world economy than Europe. Its total output may still be smaller, though that depends on what definitions and exchange rates you take. But without doubt it is the region which is contributing the greatest growth to the world economy. Something like three-fifths of the increase in world output in the last five years has come from East Asia, despite the slow growth in Japan. As the chart on the left shows, with exchange rates at purchasing power parities, China has overtaken Japan as the world's second largest economy. At some stage in the first decade of the next century the output of developing countries will pass that of developed ones.
As the balance of the world economy continues to shift away from Europe and North America, and I think there is sufficient momentum in East Asian growth to ensure this continues for another decade, maybe longer, so too will the balance of influence in the management of the world economy - and the balance of influence of East Asian markets in world markets.
This gradual loss of influence is something we will have to accept. It is an inevitable historical shift, and in a way one which we should welcome, because the alternative - economic stagnation engulfing maybe the whole the East Asian region - would be worse. What we are getting is an early taste of globalisation in re-balancing the world, and a not-wholly- pleasant taste at that.
This raises a key question: to what extent will support for globalisation be maintained through the next 25 years? Two scenarios about this process of globalisation are examined in a new book World in 2020: Towards a New Global Age, published by the OECD this week.
One is a high-growth scenario which requires further freeing of international trade and capital, transfers of technology and so on. The result would be a rise of 80 per cent in living standards in the OECD countries in the developed world and an average of 270 per cent in the non-OECD countries between 1995 and 2020.
International trade would rise from an average of 30 per cent of GDP to 50 per cent and the share of non-OECD countries in world trade from one-third to one-half. Such growth would create its own problems. The OECD points out that while growth has increased living standards in many countries, it has not always benefited the poorest people in a nation, and so there would still be 500 million people living in extreme poverty. There would also be pressure on the global environment, with a danger that greenhouse gases could double, and that there would be great pressure on food and water resources.
On the other hand if globalisation were reversed, or attempts were made to reverse it, many of these adverse effects would still occur. More generally, prosperity and political stability would be threatened, and there is a strong argument to be made that political disruption has a grave environmental impact too.
The OECD is an body which fosters economic co-operation and development - that is in its title - so naturally it is concerned with the policy implications of all this among its members, the present developed countries. But it acknowledges that globalisation is increasingly being driven by the "big five", Brazil, China, India, Indonesia and Russia, whose share in the world economy, now 21 per cent, will rise to 35 per cent in the high growth scenario in 2020, and 30 per cent in the low growth one (right hand graph).
Focusing on this "big five" is helpful because it makes you realise not only that power will shift, but in which direction it will shift. For these five countries become as big as Europe and North America put together - much bigger on the high-growth scenario.
They are not, of course, homogeneous. Far from it. Russia, in terms of the balance of its population, is within Europe. Will it behave in its trade policies, its attitude to economic and finance, more or less as a European nation? Will it become more like us? Will Brazil behave more like the United States, part of an enlarged American Free Trade Area? (Nafta becomes Afta.) Will India carry on the market reforms it started at the beginning of the 1990s and which are currently on the back burner?
Those are all gigantic questions, almost bewildering in their scale. But you do not need to try and answer them to see the practical implications of a world where Europe and North America combined have 23 per cent of the world economy and this big five have 35 per cent. Markets follow money. This would be a world where the financial markets of the big five would matter more than the markets of Europe and North America. We would become the tail. They would be the dog.
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