Hamish McRae: East of Wall St

China and India are no longer willing to listen to financial advice from the West. The balance of power – economic, social and political – has shifted, and we must accept our fate, says Hamish McRae

(AP)

We are, inevitably, focused on the events of tomorrow – the cuts. The debate inescapably will be about their likely economic and social impact, the pace at which they are being pushed through, perhaps too the blame for the fact that we have to do something like this at all.

But to see this in the context of British politics is to miss its true significance. The whole of the developed world is facing similar problems. We happen to have a relatively high running deficit, about the highest relative to GDP in the world. But other developed countries have high deficits, too, and in many cases a higher stock of public debt. Some also have a much more adverse demography than the UK. Their societies are ageing more swiftly, and have to confront the combination of a shrinking workforce and a rising number of pensioners. So just about the entire developed world is starting to head into the same path. And we face not just a scaling-back of our national finances. It is a scaling-back of our influence and, indeed, our ambitions.

This last point was brought home to me rather brutally a couple of weeks ago. I was in Muscat talking with a group of young journalists. How, I was asked, would the spending cuts affect British foreign policy? I pointed out how, irrespective of the cuts, we would be redirecting the focus of policy towards India and China, and by implication away from Europe and the United States. But, I added, we had to accept that we would be less important in the world.

"Correction," said the young Indian woman opposite me. "You are already less important."

Of course, she was right, and the point could be made not just about the UK but also about any European country, about Japan, and even about the United States. What is happening is a power shift that is almost as important as the shift that took place in the 19th century as a result of the Industrial Revolution. In 1820, by far the largest economy in the world was China's, and by far the second-largest was India's. Together they made up about two-thirds of the world economy. (There is a wonderful study of the past thousand years of economic history, by the late Angus Maddison, The World Economy: A Millennial Perspective.) Then, as a result of the Industrial Revolution, the two Asian giants were overhauled first by the UK and Europe and then by the US, with the result that 60 years ago, Asia accounted for little more than a quarter of global output. Since then, and particularly since the market reforms in China from 1978 onwards and in India from the early 1990s, the position has been progressively reversed. And the pace of change is speeding up.

We will, I think, look back on 2009 as some sort of tipping point, the moment when power shifted away from the Group of Seven countries – the US, Japan, Germany, the UK, France, Italy and Canada – and towards the Brics, to use the cute acronym coined by Goldman Sachs to combine Brazil, Russia, India and China. For the gradual, creeping loss of economic might that Europe and North America had been experiencing relative to Asia for the past two decades suddenly jumped forward as a result of the downturn. We talk of there being a global recession, but for much of the world, there was no recession at all. The Chinese economy continued to grow at around 8 per cent a year, the Indian at around 6 per cent.

This divergent experience is set to continue. Growth has now returned to just about the whole world, but the developed countries are butting into the headwinds of demography and debt. The size of the workforce in China is still rising, and will for another 15 or so years before the one-child policy kicks in and population levels off. India's workforce goes on growing for another generation at least. As for debt, if you add together all debt – government debt, consumer debt, mortgages, company debt, bank debt – the numbers in the developed world range from about 450 per cent GDP for Japan and the UK to close to 300 per cent of GDP for Germany. The corresponding numbers for the Brics range from 150 per cent of GDP for China and only about 75 per cent of GDP for Russia.

In short, the most indebted of the large emerging economies carries only about half the debt burden of the least indebted of the large developed economies. Since the former are growing far faster, the relative debt burdens are likely to shift even further.

Where will this shift of economic power lead the world over the next couple of decades? There are two ways of getting our heads round this. One is to look at what has already happened and to try to think through the implications of that. Many people will be aware that China has just passed Japan in the size of its economy. Most of us could guess that China has become the world's largest market for mobile phones, with India the second-largest. We may know that China has become the world's largest car market or that the world's largest banks are Chinese. But what about the consequences of the fact that Chinese investment in infrastructure in Africa far exceeds the investment funded by all Western aid put together? Or that the Indian industrial giant Tata has become Britain's largest manufacturer? Or that the third-largest market for Jaguar Land Rover vehicles, after the UK and US, is India? Or that Santander, the Spanish bank now thrusting into the British market, has become the largest bank in the Eurozone, partly on the back of its hugely successful business in Brazil, which supplies 40 per cent of its profits.

You see my point. This shift of power is not about dry statistics of what might happen in the future. This is happening right now and it is changing all our lives, the lives of people in the West, in Africa, everywhere, every day.

The second way of thinking about this is, however, to look at some projections of what might happen. Here the starting point has to be the work by Goldman Sachs on the Brics. Some 10 years ago, Goldman created a computer model of how the four largest developing economies might grow, vis-à-vis the growth of the G7. It is only a computer model and anyone interested in economics will know that you have to be careful about any projections of growth. But in this case, it has proved remarkably accurate; indeed, if anything, it has understated the growth of the Brics. They are overhauling the G7 even faster than the early runs of the model suggested.

It now looks as though China will pass the US to become the world's largest economy some time between 2025 and 2030. At about the same time, India will pass Japan to become the world's third-largest economy. Brazil and Russia will both be bigger economies than Germany. So in about 15 years' time – no further in the future than John Major's government was in the past – the balance of economic power will have shifted irreversibly from West to East.

What might stop this? Well, you can set out a number of reasons why the shift might slow, but they are all pretty dreadful. There might be some kind of environmental catastrophe. There might be war. There might be grave social unrest. Nothing is certain in economics, as we are very much aware. There is one thing, however, that is sure: no reasonable human being could hope that the Bric countries will not continue their economic advance.

With economic power comes political and social influence. That will come hard to the little clique of countries that have thought of themselves as running the show. The key relationship will be between China and the US, with the US inevitably ceding power. But in some areas, that power will be shifted by the adoption of the Western financial model by the emerging world. I have been looking at some statistics, also from Goldman Sachs, which suggest that by 2030, the value of shares on the Chinese stock market will exceed the value of shares on Wall Street. In addition, the value of the shares on the emerging world, taken as a whole, will be much larger than the shares on all the developed markets put together. If this were to happen, would that mean that the West had lost influence, or gained it? After all, its financial system, our system of shareholder-owned companies operating in a market economy, would be seen to have won.

However, even if the Western economic system, with some tweaks, does seem to be extending its influence and in fair measure is responsible for spreading wealth, it would be most arrogant of us to assume that the spread of ideas will be only one-way. We have as much to learn as we have to teach. I don't think we appreciate the extent to which we have lost influence as a result of our catastrophic economic management of the past decade. We, and by this I mean Western governments in general, presided over a debt-funded bubble, then a banking crash, and then what was for us the most serious recession since the Second World War. The rest of the world, or at least most of it, carried on growing. There were no banking crashes in India. The Chinese government had the resources to punch through a vastly larger fiscal stimulus than any government in the West.

Of course, all these countries face serious economic and social challenges. To deny that would be absurd. You could fill another essay as long as this one just listing them. But to take one practical example of our loss of influence, whereas five years ago China looked to the West for leadership in banking supervision, it is not doing so now. The emerging world is not a great admirer of our fiscal management either. Leave aside the UK; neither the US nor the Eurozone has come through with flying colours either.

So we have things to learn from the emerging world and at many levels, not just macroeconomic management. Take industry. Why is it that Tata seems better able to run Jaguar Land Rover than its previous owners, not just British but American and German too? Take health care. Why is life expectancy in Hong Kong so much longer than in the UK and infant mortality so much lower?

The move towards a more balanced world economy will be very difficult for us, more difficult perhaps for the US than for the UK and Europe. But it is surely an opportunity, too, an opportunity to learn from these faster-growing nations, to focus on what we are truly good at, to be less self-indulgent, to think longer term about the balance of our own societies, to be self-confident about our place in the shifting world economy, rather than defensive and fearful. But one option we do not have: to slow down this shift of economic power. So we had better get our own house in order asap.