This year is pivotal for the global economy. In 2013, for the first time since mechanisation led Britain down the path of industrialisation in the 19th century, emerging economies will produce the majority of the world’s goods and services. The inhabitants of rich, advanced economies have long represented only a small but powerful proportion of the world’s population. Now, they are less economically important than the mass of people living in the world’s poor and middle-income countries.
The shift in the balance of global economic power is profound. It is also one that economists expect to continue. By 2018, the International Monetary Fund reckons emerging markets’ share of world output will have risen to 55 per cent, making the term “emerging” increasingly irrelevant.
Although living standards remain more than five times higher in advanced economies, the gap has been narrowing rapidly since 1990. Where income and growth once went hand in hand, catch-up is now the theme. In addition to the emerging economies’ half share of global output, three-quarters of the world’s economic growth is set to depend on their dynamism during the next five years.
Jim O’Neill, the recently retired chief economist at Goldman Sachs, likes to use a stark comparison for the shift. Annual growth of 8 per cent in China, he says, is now as important as 4 per cent growth in the US. It is quite a contrast from 1980 when China was growing even faster but was a relative minnow. In 1980, 10 per cent growth in China was less important than 1 per cent of any US expansion.
The long march to prominence of economies outside the Group of Seven – the US, Japan, Germany, the UK, France, Italy and Canada – should come as little surprise. Growth has been stronger in emerging economies for more than 30 years. Per capita living standards have been catching up for the past 20.
This outperformance becomes more striking when mapped out over a long timeframe. Indeed, McKinsey Global Institute has pinpointed the shifting centre of gravity of the world economy. In 1950, it lay north of Iceland in the middle of the north Atlantic. Then, as Japan began to take off, it pulled further away from the US and headed east. It is now moving rapidly southeast, shifting more in the past decade than in any other. By 2025, it will sit close to Novosibirsk in southwestern Siberia.
Richard Dobbs, a director of McKinsey Global Institute, says: “China’s economic urbanisation and transformation is happening at 100 times the scale of the UK, the first country to urbanise and industrialise and around 10 times the speed …and so China’s industrial revolution has 1,000 times the momentum of the UK’s industrial revolution”.
The shift in global economic dynamism has gone through distinct phases during the past 30 years. In the mid-1980s, large advanced economies still dominated global growth. The US accounted for almost a third, the EU for almost 20 per cent and six of the G7 were in the top 10 countries with the largest contribution to world growth (only France missed out). If the US sneezed, as the cliché went, the rest of the world economy would catch a cold.
The figures were calculated using IMF data and were based on the dollar purchasing power of local currencies, so an equivalent rise in the quantity of goods and services produced in different economies had the same weight.
By the mid-1990s, the former global titans were already dropping out of the big league. Germany and Italy no longer made the grade to be among the top 10 locations for growth, and Japan’s importance more than halved. Mexico and Indonesia made the list, a sign that being a growing country with a large population was a sure-fire way to rise in the league.
In the years before the 2008-09 crisis, China emerged as by far the largest source of growth and stormed up the charts to fourth on the back of soaring commodities output and prices.
Britain had been hanging on in the top 10 having enjoyed 30 years of catch-up growth itself after recovering from being the sick man of Europe, but it appears set to drop out of the premier league between 2012 and 2017. The world’s top 10 countries by share of global growth will have shifted entirely out of Europe and the whole EU is expected to account for only 5.7 per cent of world growth. Together, India and China will represent almost half of global economic expansion.
Such is the shift of economic power than any company still concentrating its efforts in established economies really is living in the past.
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