The global economy is currently is the throes of a great transformation in economic structure, power, and influence. The economies that have been commonly called "emerging markets" appear to have finally "emerged," and are coming into their own in terms of their contributions to global economic and financial activity, the international corporate landscape, and even the shape of the international financial system (which are discussed in turn below). As they redefine the international economy, it has become ever more important for us to grasp what this phenomenon engenders, both for the major developing economies at the forefront of this change, as well as for those---especially the least developed economies---that remain at the periphery.
As has been discussed on this blog before, the phenomenon of shifting growth drivers is not a new one, at least from the perspective of global economic history. What does appear to be genuinely different this time is the hitherto unprecedented importance of developing countries at the helm of this change: Economies like China and India are increasingly assuming an importance in the global growth picture relative to the advanced economies, such as the United States, the euro area, and Japan (see figure below).
Source: World Bank staff calculations, from IE Singapore Statlink, IMF DOT and IFS, World Bank WDI and WIPO Patentscope.
Note: Multidimensional polarity index generated from the first principal component of trade, finance, and technology-weighted growth shares, measured in constant 2000 U.S. dollars, normalized to the maximum and minimum of the full 1969–-2008 period.
What this translates into is a world that is increasingly multipolar, and will only continue to be so in the future. In fact, from the perspective of relative economic size, the world is more multipolar now than it has ever been since 1968, and this trend of greater diffusion is set to continue into the future---certainly through till 2025 (see figure below, upper line). What is important to recognize here, however, is that a more diffused distribution of global economic activity need not imply a more balanced distribution of economic dynamism. And, as a matter of fact, it does not. The distribution of the relative shares of growth contributions does dip down from the highs of the 1970s, but we are living in the midst of what appears to be a nadir (see figure below, lower line). As we leave the financial crisis of 2007/08, the consolidation in economic growth---coupled with increasing economic size---of emerging powers such as China and India means that the world actually retreats somewhat from the multipolarity in growth contributions that we see today.
Source: World Bank staff calculations.
Note: Multipolarity index calculated as the normalized Herfindahl-Hirschman index of GDP and contribution to global growth shares of the top 15 economies, computed over 5-year rolling averages.
Now, while some have framed this transition in the language of competition and in the context of the “developed” versus “developing” world, this change should really be thought of more in terms of how the global distribution of world economic activity and influence is now simply less concentrated. Hence, the story is not so much one of advanced economy decline or emerging economy might, per se, but a more balanced sharing of the tremendous benefits that comes with economic growth. Put another way, this is the sort of economic convergence in output and incomes that economists have long dreamed about, and which has thus far been elusive, and is now tantalizingly close to being realized, at least for the largest developing countries.
What might the agents of such change be? While governments, especially through their policies, will undoubtedly play a role, emerging market corporations are likely to be the nexus of change. Indeed, the evidence suggests that firms based in emerging economies are increasingly active in the global corporate landscape. Nowhere is this more evident than in cross-border financial activity, which has historically been the domain of the advanced economies.
Cross-border FDI by emerging market firms---comprising both mergers and acquisitions (M&A) as well as greenfield investments---have risen dramatically over the past decade, in parallel with the greater prominence of emerging economies at the global macroeconomic level. Cross-border M&A flows have grown from $27 billion in 1997 to $254 billion in 2010 (a close to tenfold increase), with EM shares of both number and value of deals on an upward trajectory (see figure below, top panel). To a lesser extent, this can also be seen in more modest increases in EM shares of greenfield investments (see figure below, borrom panel).
Source: World Bank staff calculations, from SDC Platinum.
Note: Gross M&A flows comprises publicly-disclosed transactions from 10,000 acquirer companies in 61 emerging market countries, and acquisitions are defined to include any equity stake (even if less than 10 percent of voting shares).
Source: World Bank staff calculations, from fDi Markets and UNCTADStat.
Note: Gross greenfield flows comprises transactions from 5,000 investor companies in 61 emerging market countries, and greenfields are defined to include new outbound FDI projects and expansions of existing projects.
This activity has not been limited to South-North flows, where one may expect emerging market firms to be more active in their pursuit of the latest technology and expertise. Emerging market firms have been also ventured into other developing countries. In a sense, this is intuitive: Having been exposed to challenging business and policy environments back home, emerging market firms are particularly well-suited to contend with similar climates in other developing nations.
The expansion of cross-border private business activity by emerging market corporations can be seen in another important sphere. As the firms transact across national borders, they settle their trades in a designated vehicle currency, track accounts in a common invoicing currency, and book profits in an international asset currency. While the dollar has, since the postwar era, been the international currency par excellence, this is rapidly changing. When the euro entered the international currency stage at the turn of the millennium, European firms (and many emerging market firms that deal primarily with them) naturally moved a significant portion of their business dealings toward transactions in euros. As Chinese firms expand their activity abroad---China is already the dominant regional trading partner (see figure below), and the world's largest exporter---the use of the renminbi will only increase in cross-border transactions.
Source: World Bank staff calculations, from IMF DOT and World Bank WDI.
Note: Map for trade concentration relative to China, 2005--09 period average. Trade concentration of country i relative to country or area j is calculated as TCij = (exports of i to j + imports of i from j)/(total trade)i * 100.
This trend will only be bolstered by official cross-border activity. Chinese sovereign wealth funds are already some of the largest in the world. China's reserve holdings are also massive. The benefits of issuing debt in one's own currency are significant, and there are also nontrivial seigniorage gains from issuing an international currency. Taken together, both private and public uses of money point toward the renminbi as the next likely international currency.
What future does a multipolar world hold for developing countries? Of course, since the major developing countries are at the forefront of the entire multipolarity phenomenon, their greater involvement in the future direction of the global economy means that decoupling between the advanced and emerging world (at least at the trend level) may finally come to pass. To the extent that this greater diversification of growth activity translates to a world that better weathers shocks and is more resilient to crises, developing countries of all stripes (not just the rising powers) will benefit.
Indeed, even economies currently in the periphery of world economy---especially the low-income countries (LICs)---can enjoy greater stability of external demand and experience some mitigation from volatility due to idiosyncratic shocks in any one growth pole. Over the past decade, economic complementarities between the large potential emerging economy growth poles and LICs (the former tend to hold a comparative advantage in manufactures, the latter in commodity inputs) have allowed for a mutually reinforcing trade-growth process between the so-called BRICs (Brazil, Russia, India, and China) and LICs.
It is important to recognize, however, that the specific impact of multipolarity on the developing world is likely to differ according to the country. LICs that are net importers of commodities and mineral resources may face higher global prices due to increased global demand for raw materials. Even in cases where LICs are net commodity or resource exporters, export-biased growth in these economies runs the risk of immiserizing growth. And LICs maintaining floating exchange rate regimes may experience heightened foreign exchange volatility in an uncoordinated multicurrency system, since they typically possess limited hedging capabilities.
A new unfolding reality awaits us, and it behooves us to better understand these developments. This is precisely the aim of the inaugural issue of Global Development Horizons, which seeks to open the conversation on these very issues, and more.