The Impact of the Rise of Emerging Economics on the Larger World Economy

Jiang Yuechun

The Impact of the Rise of Emerging Economics on the Larger World Economy

Jiang Yuechun

Since entering the twenty-first century, emerging economies have been rising rapidly. Their fast economic growth and increased share in the global economy have become outstanding features of world economic development. The rise of emerging economies has exerted strong pressure on the Western-led global economy, but it will necessitate protracted efforts in order to fundamentally reshape the existing international economic structure. China must maintain its basic characteristics as a developing country, while actively promoting the transformation of the international economic order.

I. The rise of emerging economies is a new feature of world economy today.

1. Emerging economies have become an important engine for world economic growth.

In the first decade of the 21st century, the average growth rate of emerging economies exceeded 6%. Among them, China grew on average more than 10%, India over 7%, Russia over 6%, and BRICs countries over 8% on average. This can be compared to the growth rate for developed countries, which was merely 2.6%, and the global average, which was 4.1%. In 2010, the global economic outlook continued to follow the trend of “the South overtaking the North”; the advanced economies experienced continued poor performance while emerging economies developed into their roles as major economic growth powerhouses. According to the latest World Economic Outlook report released by the IMF on January 25, 2011, the global economy is projected to grow faster this year and next year, at the rates of 4.4% and 4.5% respectively. This is slightly higher than the 4.2% forecasted in October 2010, but lower than 4.75%, the real growth rate for 2010. The IMF estimates that the advanced economies will grow at 2.2% for both 2011 and 2012, and higher than 2.2% for 2010. Of them, the U.S. is expected to grow at 3.1% and 2.7% respectively, while the Euro zone is expected to grow at 1.5% and 1.7%, and Japan is set to grow at 1.6% and 1.8%. In contrast, emerging and developing economies will achieve an average growth rate of 6.5%, while China is anticipated to grow at 9.6% and 9.5%, India at 8.4% and 8.0%, Russia at 4.5% and 4.4%, and Brazil at 4.5% and 4.1%. Emerging and developing economies will maintain fast growth rates despite the different degrees of inflationary pressures that they face. The 2011 Nomura Global Outlook anticipates a tale of two recoveries this year, with emerging economies growing faster than the developed world. Emerging economies are likely to contribute three quarters of total global growth, half of which will originate from China and India.

2. The share of emerging economies in world economy is growing notably.

According to the latest GDP rankings released by the IMF in February 2011, China’s GDP is estimated at $5.75 trillion, ranking number 2 in the world. Meanwhile, Brazil’s GDP is estimated to be $2.02 trillion, ranking eighth in the world, while Russia’s GDP of $1.48 trillion is the tenth largest and India’s GDP of $1.43 trillion is number eleven. The five BRICS countries account for 30% of land area in the world and 42% of world population. In 2010, the combined GDP of the BRICS was 10% of the world’s total, and their combined trade volume accounted for 15% of the global total. According to Jim O’Neill, the Goldman Sachs chief economist who coined the term “BRIC”, the combined GDP of the BRICS countries is estimated to exceed that of the world’s largest economy – the United States – by the year 2018. The 11 developing countries of the G20, seen as the representatives of emerging economies, account for 20% of the world’s GDP. Some of them have already yielded a higher GDP than other medium developed countries (excluding the United States and Japan). Their share of global exports has now risen to 42%, from 20% in 1970, and they possess two-thirds of the world’s foreign exchange reserves. Emerging economies have managed to keep relatively high growth rates while becoming important forces for stabilizing the world economy, even though they have also suffered from this round of economic crisis. Their contribution to the world economy has also been increasing alongside the rising volumes of their economies. According to the IMF, the developed world’s contribution to the global economy declined from 88.6% in 1990 to 30% in 2010, while the BRICS countries’ contribution rose from - 0.6% in 1990 to more than 60% in 2010. Thus, it is clear that emerging economies have become the engine of the global growth.

3. Emerging economies have become increasingly influential internationally.

In recent years, emerging economies have played an increasingly important role internationally. Their relatively fast development and respective recoveries from the financial crisis have drawn the world’s attention, and their positions in global economic governance have been enhanced, marked by the first G20 summit in November 2008 in Washington, where major developed countries and emerging powers together discussed how to tackle the international financial crisis. At that meeting, the participating countries reached many important agreements. This decided to strengthen the role of the G20 to work for a sustained and balanced world economy; deepen the reform of international financial institutions; include the issue of development on the long-term agenda of the G20 to create conditions for narrowing the North-South gap and balancing global economic development; and formulate new steps to strengthen international financial surveillance and combat protectionism. The economic rise of China, India, Brazil, Russia and others became a focal point of discussion during the summit. The developed countries of North America and Europe, which have long been the centers of the world economy, are beginning to lose their luster and the gravity is shifting eastward. The growing influence of the BRICS countries calls upon the attention of other emerging countries. In April 2011, leaders of BRICS countries met in China’s Hainan, where South Africa was officially accepted as a member of BRICS group. It is the first expansion of this group. With its member states hailing from four continents, the group is more inclusive and dynamic than previous international economic organizations.

II. The rise of emerging economies has far-reaching implications for the world economic structure.

1. The rise of emerging economies is accelerating the multi-polarization of the world economy.

The world economy is experiencing its largest transition since the industrial revolution, with the center of growth shifting from the developed world to the emerging market countries of Asia, Eastern Europe, the Middle East and Latin America. In the unipolar world formed since the end of the Cold War, “if the United States sneezes, the rest of the world will catch a cold.” Yet this unipolar world is changing now. Multiple economic growth centers and diversified economic powers are emerging. In particular, as Asian consumption markets are becoming increasingly mature and intra-regional trade is growing rapidly, the imbalance between a strong Western world and a weak Asia has been corrected to generate a more balanced and multipolar world. Because emerging economies are located in various parts of the world, the economic diversification that we are seeing will promote a great change in world culture, while inevitably advancing the multi-polarization of international politics. On the other hand, the traditional division of labor is being shaken. The postwar international division of labor has been characterized by the West monopolizing high-technology industries while developing countries are relegated to low value-added industries. Yet since the advent of the new century, the application of the Internet has expanded high-tech industries and service outsourcing and accelerated technology diffusion. As a result, high value-added goods have accounted for a growing share of world exports, and the high-tech and service industries are no longer monopolized by a small number of countries.

2. Emerging economies have become important players in economic globalization.

Since the financial crisis began two years ago, it has seemed that the global economy has been losing momentum. In the wake of strong development since the 1990s, the past few years have seen a decrease in global trade and international investment. But the financial support to the West and the strong commodity demand by emerging economies, especially China, have directly advanced the global economic recovery. The trend of economic globalization will continue, and it has displayed distinctive features in the post-crisis era. First, the major player in economic globalization has changed. In the past, developed countries dominated globalization and their overseas investments and their demand for imported goods facilitated the fast economic growth of emerging countries. Now, the emerging economies have reversed their passive position and have begun to provide capital and markets for the developed world and other developing countries. They too are now important players in economic globalization. Second, economic globalization is taking on multiple forms. Bilateral free trade agreements and regional economic integration are booming, even despite the fact that the Doha Round of trade negotiations has fallen into a deadlock and brought the process of multilateral trade negotiations to a standstill. Third, economic globalization is scaling up its influence. Economic globalization has not only strengthened economic ties between countries and deepened the interdependence between economies; it has also intensified the competition between countries, bringing more opportunities and challenges to all the economies.

3. The rise of emerging economies has helped transform and restructure the existing international economic system.

On the eve of the G20 summit held in London in March 2009, the BRIC countries proposed reforming the existing international reserve currency system, largely in anticipation of the fact that the developed countries were going transfer 7% shares. Through unremitting efforts, significant progress was made in the reform of the IMF and the World Bank in 2010 with emerging economies acquiring more say and voting rights in these two major financial institutions. The G20 summit in Korea in October 2010 fostered an agreement to transfer an additional 4.6% of IMF shares to BRICS and other developing countries. China’s shares rose from 3.72% to 6.394%, making it the third largest shareholder (from number six), while India’s shares rose to 2.751%, making it the eighth largest shareholder, Russia to 2.706% in the ninth place, and Brazil to 2.316% in the tenth place. The original four BRIC countries are all among the top ten shareholders in the IMF, accounting for 14.163% of its total shares. This was the most important reform of IMF governance in the institution’s 65-year history, resulting in a stronger decision-making power for the BRICS. In addition, China and India have also gained more voting rights in the World Bank, with China jumping from 2.77% to 4.42%, up from to the third place after the U.S. and Japan, and India jumping from 2.77% to 2.91%, making it the seventh largest voter. Collectively, the voting rights of the developing countries in the World Bank have been raised from 44.06% to 47.19%. The status of emerging economies has thus been upgraded while developed economies have been downgraded.

III. It is difficult to undertake a complete turnaround of the Western-dominated traditional international economic order in a short time.

1. In terms of comprehensive economic strength, emerging economies still lag well behind advanced economies. They all are faced with the challenge of transforming their mode of development.

Emerging economies have an upward trend in manufacturing, but they are in a disadvantageous position when it comes to high-end industries, finance, research and development, governance experiences, human resources and education, labor productivity and economies of scale, among other areas. Nor do they have an absolute advantage in terms of their international market shares. Even China, the largest developing economy, only accounts for 6% of the global GDP, while the U.S. accounts for 22%. Since the global financial crisis, China, India and some other emerging economies have managed to maintain their growth momentum, but they are not yet strong enough to offset the negative impact of the economic recessions that have struck the U.S. and Europe.

It must be noted that there are many uncertainties in the development of emerging economies. These include institutional deficiencies at various levels, urban-rural disparities, and regional imbalance, among other areas. For emerging economies that adopt foreign-oriented growth models, these economies are forced to rely on the West in the course of their industrial upgrading and economic development. They will not have an effective say in the final consumption market and are incapable of negotiating prices of major commodities in international markets. As a result, such a growth model is inherently unsafe. Even though emerging economies have increased their foreign exchange reserves, their real purchasing power is determined by the capital price in the U.S. and European markets. In other words, their foreign reserves face the risk of a weaker Western economy. Therefore, industrial restructuring and a complete transformation of their growth models are the only choice for emerging economies in order to experience sustained growth.

2. The U.S. supremacy in the world economy will remain unchallenged, and the reform of international economic order and financial system will be a long historical process.

The United States has maintained its status as the world economic superpower since it national GDP topped the world in 1894. The Breton Woods system – the postwar arrangement for the international financial order – was designed to follow the United States’s principles so as achieve its economic monopoly. The U.S. dominance of the world economy has remained unchanged though the currency system in the Breton Woods agreements collapsed in 1971. At present, the United States not only leads in various economic indicators, but also benefits easily from its stronger position in the international economic system. The current international financial system is still largely led by the United States, and the central status of the U.S. dollar as the major currency has remained intact despite the current economic crisis. This means that the United States’absolute authority in international rule-making will not change in the short-term. In 2006, before the crisis, the proportion of the U.S. dollar in international reserve currencies was 65.3%, but now it accounts for 80% of international transactions. The status of the U.S. dollar as a reserve currency has declined since the crisis, but only by a small margin. From the close of the first quarter of 2008 to the end of the 2008 fiscal year, the proportion of U.S. dollars being held as international reserve currencies hovered around 64%, and in the first quarter of 2009, it reached 64.97%, nearly matching its pre-crisis level. The unchanged status of the U.S. dollar in the international reserve currencies is determined by two factors. First, the share of any other currency is too small to compete with the U.S. dollar. At its lowest point in the second quarter of 2008, the share of the second major currency, the Euro, was still only 26.8%, less than half of the dollar’s share. Second, the special drawing right (SDR) of the U.S. dollar in the currency basket is as high as 40%. Neither the Euro, the Japanese yen, nor the renminbi is able to shake the dollar’s status as the international currency.

In recent years, emerging countries have made some progress in gaining rights to information, expressing their opinions in international forums, and establishing a role for themselves as international rule-makers. However, these efforts are still part of a quantitative change, and not sufficient to make a qualitative change. The request to transform the international economic system is not a simple task of raising a country’s economic strength; it requires a qualitative change in the comprehensive strength of the group. Only when developing countries have acquired the comprehensive strength to change the current balance of power will the demand for a new international economic order be fulfilled. Therefore, China must on the one hand seize the opportunity to integrate the emerging economies and their appeals, and on the other hand, work together with Europe and Japan to accelerate the process in accordance with their shared interests. At the same time, China must be wary of the U.S. as an economic superpower, as it may align with Western countries to alienate China and interfere in issues such as the renminbi exchange rate policy.

3. China’s strength is on the rise, but its fundamental attributes as a developing country remain unchanged.

The Chinese economy has sustained high growth since the beginning of the Reform and Opening era. Its overall national strength and international influence have increased in an unprecedented manner. China has become the second largest economy in the world in terms of GDP, next only to the United States. In addition, China is also the world’s largest exporter, the largest country by foreign exchange reserve, the largest manufacturer, and it has the largest number of mobile phone users in the world. However it is still a developing country in terms of its place on the economic development spectrum.

First, China is classified in the group of developing countries by some international organizations of authority. The United Nations Development Program (UNDP) publishes its national human development index based on three indicators: average life expectancy, education and standard of living. In 2009, China’s index was 0.772, ranking 92nd in the world, putting China in the range of “medium developing countries.” According to the 2010 World Bank Development Report, China’s GDP in 2008 totaled $3,899.3 trillion, ranking third in the world, but its GDP per capita was only $2,940, ranking a lowly 130th, grouped in the lower- and middle-income countries with a big gap to catch up with the middle income countries. The 2010 IMF national per capita GDP rating ranked China 93rd among 182 countries in terms of GDP per capita based on PPP.

Second, from the perspective of social development, there remains a big gap between China and the developed countries. The major fact is that China is less capable of technological innovation. China devotes far less of its finances to research and development than major developed countries. In 2008, China’s R&D expenditures totaled RMB 461.6 billion, or 1.45% of GDP, while in 2005 the average percentage of expenditure on R&D in OECD countries was 2.25% of GDP. The United States has maintained a proportion of 2.27% for many years and Japan has consistently topped 3%. Investment in education is insufficient in China. According to the 2010 Blue Papers on Education in China, China’s per capita expenditure on public education was $42, while the United States spent $2684, 63.9 times that of China. When the population is taken into account, China’s per capita public expenditure on education is only 0.82% of its per capita GDP. Yet the figure for the U.S. is 6.10%, 7.44 times that of China. Likewise, Japan spends 4.28% of per capita GDP on education, while South Korea spends 3.01%, Russia spends 1.87%, and Brazil spends 2.29%. It is obvious that China has not only lagged far behind developed countries; it is also positioned behind its fellow BRICS in terms of educational expenditure. Medical infrastructure in China is also seriously underfunded. According to a report released by the economic department of the Beijing office of the Asia Development Bank in April 2009, public expenditure on medical care in China was less than 4.5% of its GDP, far below the international level. OECD countries averaged expenditures of 13% of GDP on medical care. The modernization index for China in 2006 was 38, below the world average of 53, making China rank 59th.

Third, structural problems in China are prominent in the composition of its economic development. Industrial structure is unbalanced, with excessive concentration of human resources in the primary and secondary industries. By the year 2008, the primary industries still generated 11% of the country’s GDP, while in developed countries this proportion is usually no more than 5%. The GDP proportion of secondary industries was as high as 49%, mostly generated on the low-end of the industrial value chain. Secondary industries in other developed countries usually account for no more than 30% of their total GDP, mostly from high-end industries. The service sector in China accounts for 30% of its GDP, but the world average is 65%. Apart from these indicators, there are also strong urbanrural and regional disparities in China. According to UN Human Development Report 2009, the Gini Coefficient for China was 0.415 in 2008, higher than those of developed countries such as France (0.327), Switzerland (0.337) and the United States (0.408), as well as some developing countries such as Romania (0.315), Malaysia (0.327) and India (0.368). This means that income distribution in China is seriously imbalanced, and the gap between the rich and the poor is far too large. In 2009, the Gini Coefficient for China exceeded 0.49, meaning that China had the largest gap between rich and poor in Asia, and the 25th largest gap in the world. In terms of trade structure, China is still on the low end of the global industrial chain: its exports excessively depend on the trade in goods that are resource and labor intensive, and there is not yet enough coming from the technological and knowledge intensive service sector.

Jiang Yuechun is Senior Research Fellow and Director of Department of World Economy, China Institute of International Studies.