The US has traditionally been perceived as the superpower of the economic world, closely followed by other large developed nations scattered throughout Europe. But recently, there has been an abrupt change in circumstance that’s seen the US economy falter and the so-called “superpower” lose it luster.
With the American and European governments having problems coming up with solutions to their respective debts worth trillions of dollars, some are waiting for the next global recession to plunge the world economy into financial ruin.
And why not? After all, for centuries the fortunes of the world have been made and lost on the back of US monetary management (or mis-management).
However for a couple of decades now, a new economic power player has slowly been emerging while most of us in the western world were busy focusing our attention on Europe and the US as the big boys to watch.
In Australia particularly, we have always looked to America and Europe to gauge the future health of our own economy and this ingrained cultural expectation has generally been justified, up until now.
Developing nations lead world growth
According to an article in The Age, which cites figures from the Australian Bureau of Statistics, for the last four years the net growth recorded for the world economy came, for the better part, from developing nations.
Of the 10 per cent growth (in real terms) since the March 2007 quarter, the contribution of North Atlantic economies, including the US, Canada, Britain & Europe amounted to almost zero, whereas between the Chinese and Indian economies there has been almost 50 per cent growth during that time. East Asia (excluding Japan and China) enjoyed economic growth in the order of 20 per cent.
As the growth of these “emerging economies” outpaces the rich countries, they are claiming a larger portion of global wealth and beginning to dominate the world economy. In fact at least 11 of these one time “poorer cousins” have been reclassified from developing to developed – just a small portion of what are fast becoming the new economic superpowers.
Further illustrating this shift in prosperity is the drop in gross world product coming out of developed countries. Although the likes of the US and Europe account for only around 15 per cent of the entire world population, they were managing to produce 80 per cent of the gross world product in 1990. By last year though, it had decreased to only 60 per cent and within the next seven years, this is predicted to fall to less than 50 per cent.
However these figures are not necessarily an accurate reflection of the actual share of gross world product that developing countries can claim, as they are based on converting each country’s GDP into US dollars at market rates. And of course one US dollar buys a lot more in poor countries than in rich countries.
So when you adjust for ”purchasing-power parity”, the developing countries’ share of gross world product was more like 50 per cent three years ago and is expected to reach 54 per cent this year. In other words, their share of world exports has reached half, which is almost double what it was in 1990.
Given that many multinational companies have moved a significant portion of their operations to developing countries, it’s not surprising that these emerging economies attract more than half of all direct foreign investment.
China is more than just an exporter of cheap products.
Of course countries such as China have long been perceived as economies that make their living selling cheap exports to rich countries and this is one reason their economies have continued to expand while others contract.
However according to The Economist, ”foreign firms are increasingly lured by these countries’ fast-growing domestic markets as much as [by] lower wages”.
In other words, developing countries are becoming increasingly independent and generating their own internal economic growth – no longer do they rely solely on the rest of the world to buy their goods.
These nations now account for more than half of the world’s capital spending, compared with a quarter 10 years ago; last year the US’s capital spending was just 16 per cent of its GDP compared with 49 per cent in China and 28 per cent here in Australia.
Additionally, the vast numbers of residents in these developing countries have pushed their share of consumer spending up from 24 per cent a decade go to 34 per cent today. They account for 46 per cent of world retail sales, 52 per cent of all new car sales (up from 22 per cent in 2000) and 82 per cent of all mobile phone subscriptions.
Obviously living standards are rising rapidly in “poor countries” and with local spending on the increase, so too is their share of the world import market which rose to 47 per cent last year.
What a turnaround. Where once we believed that these so-called poorer nations were dependent on rich countries for their economic wellbeing, the tables are turning as the one time superpowers rely increasingly on developing countries.
Interestingly, the very reason that the likes of America and Europe are in such financial disarray at present – the insurmountable debts they have accumulated – is why many emerging economies are enjoying such comparable good fortune; they are responsible for only 17 per cent of the world’s government debt.
This is good news for Australia
Of course for Australia this is all very good news, given that our economy is tied in with the developing world to a far greater extent than it is to “rich” nations. While we sell less than 10 per cent of our exports to Europe and only 5 per cent to the US, about two-thirds of our goods and services go to – you guessed it – developing countries, the vast majority of which are in Asia, which is now considered the most dynamic part of today’s global economy.
In just the past 10 years, China’s share of our exports of goods and services has gone from 5 per cent to 23 per cent, and India’s has risen from 2 per cent to 7 per cent.
So it seems, as treasurer Wayne Swan insists, Australia is in the right place at the right time.
Seems the jokes on you America!
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