Stephen King: Emerging economies are edging further out of the wilderness

US dominance had more to do with European failure than with a new lease of life within the US economy

As a teenager in the late-1970s, I hadn't yet discovered the joys of economics. I was, instead, more than a little obsessed with music. Perhaps you're thinking I played the electric guitar, dreaming of becoming a member of Emerson, Lake and Palmer or Yes.

Admittedly, I'm ashamed to say, I did own a few albums from these supergroups. Most of the time, though, I was playing the clarinet, and that meant I became rather heavily involved with classical music. My school friends thought I was a bit weird.

Those of you who know a thing or two about woodwind instruments will rightly suspect that my clarinet playing led me also to take up the saxophone. That, in turn, dragged me temporarily away from classical music towards jazz. I found myself playing tenor sax in my local youth "big band".

One of the conductors involved in local youth music thought it would be a jolly good wheeze to take the band on a European tour. Typically, of course, these tours tended to involve a quick hop across the Channel and a coach journey through Northern France (or, for the lucky few, an exciting foray into Belgium).

Our conductor, however, was a little more ambitious. It turned out he was a card-carrying member of the Communist Party. He thought we would benefit from a trip behind the Iron Curtain. So we got our instruments together, toddled off to Heathrow, boarded a creaking Tupolev 154 and ended up in Bulgaria.

I now realise that the time I spent in Sofia and Plovdiv (Bulgaria's second-largest city) provided me with an early lesson in economics. In particular, my Balkan sojourn was a lesson in market failure. At the time, Bulgaria had exchange controls. Although the official exchange rate was 2.38 levs to the pound, the "black market" exchange rate was between 6 and 10 levs to the pound.

The black market was everywhere. It was an odd experience to walk through the streets of Sofia being accosted every five minutes by surreptitious money changers, all desperate to get hold of foreign currency that could then be spent in the so-called tourist shops where a limited number of otherwise-unavailable western goods could be bought. For us, Bulgaria was already cheap at the official exchange rate but, at black market rates, we were able to live like kings.

Fashionable Bulgarians were also very interested in the clothes we were wearing. I recall an occasion at an outdoor disco when someone made an offer for my jeans. Levis were particularly popular at the time. I would have sold them - for a substantial profit - had it not been for the fact I would have had to spend the rest of the evening cavorting around in my underpants.

These experiences, on their own, were enough to make me recognise that something wasn't quite right. The marzipan and icing on the cake came, though, from two other incidents.

The marzipan was a conversation about cameras. My Bulgarian hosts were convinced that Praktica, in those days an East German brand, was the best camera manufacturer in the world. As a teenage boy, I knew a thing or two about cameras and, in particular, recognised that while a Praktica would take good photos, it was no match for the Canons and Nikons coming out of Japan.

The icing was a tour of a school in Plovdiv where we were taken to the biology, chemistry and Marxist-Leninist laboratories. In the last of these, pupils were taught all about the gross inequities of the western world. Of course, this was the time of high oil prices, rampant inflation, frequent strikes and rising unemployment, so you could see how a little propaganda might go a long way.

I mention all this because the world I've just described is, of course, a world that no longer exists. Yet when we think about the global economy, most of us still tend to think that the developed world - a euphemism for the rich, capitalist, west - still calls the shots. We like to think that the rest of the world is, somehow, still disconnected and, therefore, we end up ignoring some of the really big changes that are now happening in the global economy.

If there's a lesson from my Bulgarian trip, it's that Bulgarians - and presumably many others who lived in repressive regimes - were desperate to emulate western lifestyles. Given the opportunity, they would happily consume all manner of products, even at ridiculously inflated prices or, in the case of my jeans, with worryingly poor standards of hygiene.

The end of this repression has unleashed a huge wage of additional demand in the global economy that is changing the balance of economic power across nations. Every year, as previously repressed economies make further steps out of the economic wilderness, economic relationships change. One consequence of this has been the declining relevance of the United States.

This is not to say that the US is unimportant. Rather, the global economy no longer depends on the US for its momentum. Last year, the US housing market collapsed. As a result, US domestic demand and import growth came in below economists' expectations.

Now, imagine you are a rather unusual economist, someone who is able to look at future domestic US economic developments with perfect foresight, but who has no more knowledge than anyone else about the rest of the world. What would you do armed with information that told you that US domestic demand was going to be disappointingly weak? I'd imagine you'd be tempted to slash your export forecasts for America's main trading partners. The next step would be to use those export downgrades to predict income losses and, hence, weaker consumption and investment elsewhere in the world. It wouldn't be long before you'd be worrying about a global economic downturn.

Last year, your perfect foresight would have been of no help at all. Although US demand was weaker than expected, the rest of the world absolutely boomed. US national income was still able to rise by a healthy 3.4 per cent because US exports were lifted by strong consumption and investment demand elsewhere in the world.

And who was doing all this spending? Out of the top 10 destinations for US export growth, five - Mexico, China, South Korea, Brazil and the United Arab Emirates - were emerging markets. Mexico's and China's contributions were double those of Germany and the UK, eight times bigger than those of France and 16 times bigger than Italy's.

Back in the 1950s and 1960s, global growth was dominated not by the US but, rather, by western Europe and Japan. Even in the 1980s, people regarded the US as an economic laggard, unable to keep pace with Japan and Germany. Arguably, US dominance thereafter had more to do with European and Japanese failure than with a sudden new lease of life within the US economy itself.

Europe and Japan are still weak but their former teen spirit lives on in the rapidly growing emerging markets. In the 1970s, when I had my opportunity to visit Bulgaria, their success was but a distant dream. After years of economic repression, however, emerging markets are finally catching up. Now, the emerging tail is wagging the American dog.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com