May 27, 2024

Economix: The World Economic Order, Circa 2025

Color China Photo, via Associated Press

With China overtaking Japan as the world’s second-largest economy last year, there can be no doubt that emerging markets are becoming increasingly powerful.

A new report from the World Bank predicts that by 2025, China, along with five other emerging economies — Brazil, India, Indonesia, South Korea and Russia — will account for more than half of all global growth, up from one-third now.

The report, “Global Development Horizons 2011 — Multipolarity: The New Global Economy,” also anticipates that the dollar will be joined by the euro and the renminbi as dominant international currencies. The Chinese government is already easing currency controls and has taken other steps to help the renminbi become a fully convertible reserve currency, which would make it easier for foreign companies to finance projects in China.

Hans Timmer, director of development prospects for the World Bank, said in an interview that despite the current sovereign debt crises roiling Europe, the euro remained a strong and viable currency. “With all the problems they have had in the past 10 years, they have been successful,” Mr. Timmer said. “A big part of global reserves is denominated in euros. There is more borrowing going on in euros. As a reserve currency, dollars are still dominant, but countries are drifting away from the dollar into the euro.”

According to the report, the fast-growing developing countries will continue to outpace those in the developed world — mainly Europe, Japan, Britain and the United States. The emerging economies will grow at an average pace of 4.7 percent a year between now and 2025, while the developed countries will grow at an average of 2.3 percent.

For developing countries to keep up growth rates, the report’s authors write, they will have to innovate their own technologies and improve productivity.

Mansoor Dailami, the lead author of the report, said there was growing evidence that developing countries were beginning to invest in research and development that would lead to new technologies. He pointed to data showing that of the top 1,000 companies investing in research and development in 2009, 114 of them were from emerging economies. He also cited an increasing number of patents and scientific articles generated by researchers in developing countries.

Another key driver of growth for emerging economies, which have grown exponentially by offering cheap labor and low-priced consumer goods to developed countries, will be the ability to get their citizens to spend more on domestically produced goods and services.

Mr. Timmer said the evolution toward domestic consumer spending would come naturally. In China, for example, the demographics of the population is shifting toward older age, which in turn tends to force savings rates — currently high in Asian countries — down.

“Elderly people don’t earn, but they do spend,” Mr. Timmer said. “So from a macroeconomic perspective there is more consumption relative to earnings.” He added that with rising income levels in emerging countries, consumers would naturally begin spending more on domestically produced goods. And maturing economies develop larger service sectors, which tend to be locally staffed and financed.

Mr. Timmer said that the United States needed to view the shift in economic power as an opportunity rather than a threat. “There will be increased future opportunities for the U.S. increasingly to export more advanced products and more luxury products into those new emerging countries,” he said.

He added that it was also a matter of perspective. “There is a lot of cross-border investment between Europe and the U.S. going into Europe and coming out of Europe,” he noted. “And those are win-win solutions for all the companies involved. That is a picture that is very well understood by companies and governments, but when you talk about relationships with emerging economies, suddenly people are afraid.”

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