Capital Ethiopia Newspaper

A changing balance of global economic power

Many world renowned economists often stated that the current process of globalization is experiencing its new and third global wave. According to their explanation, the first two waves of the globalization process were highly engineered and dominated by the forces of the “Anglo-Saxon” – Britain and the United States.
The composition of global growth and wealth has changed dramatically since the 1990s. The recent economic crisis in the United States and Europe and the ever increasing economic prominence of the BRIC countries of Brazil, Russia, India and China contributed significantly for the changing balance of the world economic power.
China’s economic transformation and sustainable fast development is phenomenal. It enabled her to emerge as the second largest economy in the world. Many also predicted China to overtake the United States as the number one world economy in the coming ten years.
This ever growing economic prominence also enabled China to have greater political and economic leverage in the current global political and economic operations. For instance, unlike in the old “bad” days, the leaders of the United States and Europe tried their level best to persuade China to lend its well built and very strong financial hands to rescue their badly affected economics.
As it has been mentioned earlier, China’s rise has been well documented but it is not alone. From 2001 to 2010, the ‘G8’ countries which include Brazil, China, India, Indonesia, Korea, Mexico, Russia and Turkey, have contributed the same additional output to the world GDP as the “G7” group of rich nations. Flows of goods and services, commodities, people, remittances, and portfolio and direct investments are all on the increase between countries of the developing or emerging economies. By the same token, no one can deny the fact that the recent economic crisis seriously affected the living standards of millions of peoples of Europe and the United States.
However, the reality is that while countries like China, India and Brazil will soon have the largest economies in the world, living standards have a long way to go before they catch up with those in Europe, the US and Japan. According to the World Bank and OECD recent study reports, only 31 per cent of people in Latin America and 13 per cent of people in Asia are part of the ‘global middle class’. The facts on the ground revealed that, the emerging economies are catching up but doing so more slowly than is often realized.
What this shift implies is that unlike the two previous waves of globalization which is dominated in turn by Britain and US, the current ‘third wave’ is not characterized by one underpinning economic paradigm or a single dominant country, although the rise of Asia will loom large. Indeed, the world is becoming increasingly diverse in its approaches to economic policies. However, this growing interest to test new policy responses needs to be anchored by a commitment to a set of basic principles shared between the developed and emerging economies to ensure that it does not erode global cooperation and a sense of a shared global interest.
In this third wave of globalization and changing balance of economic power, the institutions that provide the glue of rules-based multilateralism need to undergo a process of adaptation based on a simple principle. They need to broaden their governance to take in and reflect new states and their growth paths, widen the scope of their intellectual and empirical frameworks, and ensure, at all costs, that they remain relevant to the emerging powers which are redefining the global economy. This high road in turn requires collaboration and partnership between nation states and an urgency of decision-making which manages short-term needs in the long-term global interest. The crucial issue here is, what are the possible ways to achieve the above mentioned goals.
In the current global economy, people, particularly in the developed world, are understandably concerned about whether this third wave of globalization is essentially in their interests. They fear that as the East emerges, the West will become ‘submerged’. However, as they grow, these economies create new markets for high-value goods and services from the west. The challenge for developed countries particularly to Europe is to transform their people from consumer to producer, to be smarter and more specialized, more innovative and more energetic, if they want to secure their share of the world’s rising demand. This will require both personal and corporate entrepreneurialism and adaptability, and the support of intelligent government in building the capabilities in education, science, skills and infrastructure on which individuals and firms compete.
There is little doubt that globalization, through its positive impact on growth, is contributing to the increased demand for commodities and creating resource constraints, particularly of food and water. Increased international trade in goods can also contribute to climate change through increases in shipping and aviation. But the spread of ideas and technologies can also help solve these problems. The answer is not to dismantle globalization, but to make growth itself sustainable.
However, understanding that there is a potentially more benign path ahead does not guarantee that it will be followed. As repeatedly explained, one of the principal causes of the global financial crisis was the build-up of serious current account imbalances. Deficit- and surplus-bearing countries are equally responsible for these imbalances. Deficit countries need to rebalance their economies away from debt-fuelled domestic consumption and towards savings and exports, while surplus countries need to do the reverse by reducing their dependence on exports and building domestic consumption.
Narrow growth strategies focused entirely on exports will entrench existing global imbalances and prevent advances in living standards in developing countries from being shared equitably.
Contrary to what has being practiced in Greek, there is a need to distinguish between healthy tax competition and competition that undermines the revenue mix needed to support national finances, pushing the burden unfairly and counterproductively on to personal and consumer taxpayers, and giving international companies an advantage over domestic firms.
The world has so far avoided a protectionist spiral of the kind seen in the 1930s. Nonetheless, there has been an increase in protectionist measures, public support for trade in a number of countries, notably the US, has fallen dramatically, and the WTO’s Doha trade round has stalled. Since in the last few years, multilateralism has had few successes. WTO negotiations, subsequent G20 meetings and most climate change negotiations have ended in relative disappointment. Reforms are clearly needed to increase the legitimacy and effectiveness of the world’s international institutions.
Weather they are developed or developing, individual governments need to be active in helping to equip businesses and individuals to prosper in the global economy. If they do not take on this role, globalization will only benefit the few, not the many, and this will fuel a public backlash and, potentially, a resurgence of nationalism and protectionism.
Prosperity in the decades ahead for the advanced market economies in Europe, North America and Asia will more than ever before rest on their ability to generate and apply knowledge to provide the world’s consumers with high-value-added goods and services. It will need to be a journey of perpetual movement up the value chain.
For developing countries like Ethiopia, there should be a need to move firmly beyond the current mindset of the government in its agricultural and industrial policy. Markets, private business and entrepreneurs should set much of the pace, but government and public agencies should also play roles that go far beyond the ‘neoliberal trinity’ of property rights protection, contract enforcement, and sound money. The government should set out clear, coherent and achievable strategy for every sector which enables the country to have comparative advantage and competitive in the global economy.
The aim of the national education and skills development strategies should be primarily aimed to create well-skilled and adaptive workforces, capable of responding quickly to changes both in the national and global economy, and properly utilized by employers. Governments need to ensure that the overall skills level of their working population is as high as possible to allow them to compete. But this compact works two ways. The skills already existing in the economy should be being properly utilized by businesses, with those in lower-skilled sectors given access to with opportunities for progression and development.
Effective mitigation of globalization’s negative consequences requires the creation of social protection systems that can meaningfully support workers and help them to thrive in the global economy.
Managing globalization to ensure that the upsides are maximized and the downsides minimized require an acceptance that globalization is a means to an end, rather than an end in itself. If we accept that those ends are the essential progressive aims of sustainable growth, rising prosperity and receding inequality then the current model of globalization has significant weaknesses. Governments cannot stand back and assume that the outcomes from global economic integration and rapid economic change will be benign.