It is all change at the top of the world economy power league. Not since the late 19th century, when the US overtook the UK as the world’s largest economy, has there been a re-ranking this significant. The International Monetary Fund and World Bank annual meetings this October mark roughly the moment that China will become the world’s largest economy.
Although the reinstatement of China as economic top dog has been forecast for years, we have leading statistical agencies to thank for bringing forward the date, now likely to be 2014 rather than some time in the 2020s. In April, they found that a typical Chinese citizen could buy more goods and services with one renminbi than previously thought.
Coming together under the International Comparison Program (ICP), hosted by the World Bank, these statisticians announced new conversion factors – purchasing power parity indicators – to estimate what money can buy in different countries.
The logic followed that China’s economy was producing much more than previous estimates showed, hence its economy was bigger. The effect of these changes was dramatic. For 2005, when the ICP last looked at purchasing power in different counties, the internationally accepted size of China’s economy was deemed to be only 43 per cent that of the US. In the latest estimates for 2011, China’s share had increased to 87 per cent. Once the more rapid growth of China since 2011 is included in calculations, it overtakes the US in 2014.
The hurt US reaction was entirely understandable, while the fury in China, which fought for a year to undermine the new data, was more surprising. Those familiar with the process say its leaders did not want exposure to the international pressure that comes with being the world’s largest economy.
But China’s ascendancy to the top of the league is far from the only significant trend in a rapidly changing global economic landscape. The ICP report also showed that in 2011, the total output of advanced economies had already declined to only 50.2 per cent of the world’s total. With persistently stronger growth rates, an increasing majority of global economic activity now occurs in poor and middle-income countries.
The speed of change has exceeded predictions and has been accelerated by the global financial crisis and its aftermath. With recession followed by anaemic recovery, advanced economies have expanded only 4 per cent in the six years between 2007 and 2013. The equivalent growth in emerging economies was 37 per cent, nine times faster.
Emerging economies have not had everything their own way, however. International Monetary Fund figures show that their growth rates have been slowing down for many years from an annual average of 7 per cent between 2003 and 2007 to a forecast annual 5 per cent growth rate between 2014 and 2018. Worse, the emerging economy slowdown has been broad-based and largely unexpected.
The one thing that rich and poor economies have in common is that the growth performance since 2010 has been disappointing. The IMF and independent forecasters have been forced to scale back expectations of economic growth, revising their annual forecasts down in every region since 2010. When countries such as the UK have bucked this trend, surprise has come mostly because expectations were so low, not because growth was historically high.
The Conference Board, an international thinktank, is concerned that a global productivity crisis is haunting the world economy. Productivity growth is the critical factor for raising prosperity in the medium term in rich and poor countries alike, and the world’s ability to turn labour and capital resources into goods and services has declined for the first time in decades.
“This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation,” according to the Conference Board.
But there are exceptions to this pessimistic assessment. Many post-communist and post-conflict countries have experienced remarkably rapid expansions over a long period. The top 10 performing countries over the past 20 years include Rwanda, Mozambique and Angola. While Greece, Italy and Japan are near the bottom, instability in Libya was even more damaging.
It is important also to note that with the emerging world far larger than it used to be and still growing faster than rich countries, the overall growth of the world economy is not that slow.
Christine Lagarde, managing director of the IMF, thinks global growth of just over 3 per cent this year is “too weak . . . and uneven”. But that rate of expansion is normal in recent decades. The global economy grew at an average rate of 3.2 per cent in the 1980s and 3.1 per cent in the 1990s.
It is only in comparison with the pre-crisis period of 2004-2007, when it averaged just shy of 5 per cent, that the world economy seem sluggish. Unfortunately, it is entirely normal that the world economy faces many deep challenges that prevent faster expansion.
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