Sustained growth that large emerging countries have experienced over the last decade and more have conferred them a considerable growth delta over OECD average. Combined with very large populations, these growth differences translate into a new world economy. For the first time in history, the countries with the largest economic mass are not also the richest countries. The shorthand for this complex event is Shifting Wealth.
The global macroeconomic effects emanating from the rise of the converging countries crucially define future core development strategies in poor countries. The macroeconomic output linkages between converging and developing countries, the shape of relative prices for goods and services, wages and terms of trade, the potential for development finance that arises from the new asset positions in the emerging countries delineate the new strategic setting for development partners and policy. As a result of their demographic and economic weight in the world as well as their superior growth performance, China and increasingly India matter in particular.
In the past two decades there has been an acceleration in the realignment of the global economy, which was reinforced during the crisis years 2007 and 2008 as large converging countries remained in recession only shortly. Three developments have been particularly important. First, the initial wage shock resulting from the absorption into the global labor force of massive numbers of workers in emerging economies; second, the increase in commodity prices that has transferred wealth to raw material exporters mainly in the emerging world; and third, the switch of many emerging countries from a net debtor to a net creditor position. So the world has recently witnessed new directions for global macroeconomic parameters that constituted a marked change from patterns experienced over the preceding decades and that require to recalibrate development perspectives and strategies:
· growth in many poor countries began to pick up durably, stopping long histories of underperformance, notably in Africa; emerging-country growth has been increasingly linked to China’s growth and implicitely benefitted from China’s competitive exchange rate;
· the relative price of many raw materials and the terms of trade of raw material exporters started to rise, reversing their decline which for so long had been perceived as ‘secular’;
· labour-intensive manufacturing production, by contrast, became subject to increasing price pressures, as did low-skilled wages, resulting from the absorption into the global labour force of massive numbers of workers in emerging economies;
· as an initial response to the convergers’ economic opening, global inflation, interest rates and capital returns were steadily sinking, as did the spreads on emerging-market bonds as savers invested their assets increasingly outside the OECD area;
· in emerging countries, the need for asset management capabilities increasingly complemented the traditional policy focus on debt sustainability and management, as official reserves and sovereign wealth fund assets rose and many emerging countries turned from net capital importer to global financier.
To be sure, the unique geo-economic constellation of the 2000s, combining Asian export-led growth with US overconsumption - in a dollar-based reserve system that is akin to create liquidity bubbles in a rapidly growing world economy - is unlikely to continue as the 2008-09 financial crisis has concentrated minds on the urgency to rebalance the world economy toward stronger, cleaner and fairer growth. The need to switch from export-led to consumption-led growth in China and rising inflation pressures in leading convergers makes it questionable whether their superior growth performance is here to stay. Nothing could be more deceptive than to assume a linear continuation of trends seen during the last decade.