The Emerging Tri-Polar World EconomyConsider the big picture, as we’ve laid it out in previous issues of Trends:
? The population of the developed world is rapidly aging.
? The United States is the only advanced nation where the workforce is forecasted to grow over the next 50 years.
? The populations of the EU and Japan are actually expected to shrink over that time period.
? Even China is rapidly aging and the size of its workforce will peak around 2025.
? At the same time, Latin America, India, the Middle East, and Africa all have young, rapidly growing populations of under-utilized workers and under-served consumers.
To put it succinctly, in the 21stcentury, the world faces a population implosion in developed nations, while over-population continues to be the norm in most developing countries.
Looking ahead to mid-century, the developed nations will have very high median ages, enormous health care burdens, and an unsustainably high ratio of retirees to workers.
At the same time, developing countries will have large, young populations with few economic opportunities.
These impoverished billions will be increasingly crowded into a few Third World cities surrounded by poverty and disease.
Meanwhile, the slow-growth domestic economies of the EU, Japan and North America will not be able to fund the lifestyles demanded by their aging citizens.
In both settings, a mismatch of a population and its economic environment will give rise to a host of social and political problems.
The unemployed, under-employed and disaffected youth of the developing world will represent a huge destabilizing force, with a continued rise in crime, terrorism, and a general sense of despair.
At the same time, we’ll see a collapse of the European social safety net, as well as disappointed retirees in the U.S. and Japan.
But, as Professors Jagdish Sheth and Rajendra Sisodia observe in their new book, Tectonic Shift,1 “There is one sure way for this bleak picture to be brightened and for hope to take wing.
That is for the developed world and the developing world to recognize how desperately they need each other and the extent to which the solutions to their problems lie in embracing each other.”
Instead of trying to grow by trading among themselves, the most advanced countries will grow much more quickly by trading with the big emerging nations.
Recognizing this, the world is already becoming realigned along a north-to-south axis, and it is in this realignment that we see the beginnings of an alliance between the developed and developing worlds.
Young countries are seeking out older ones.
Countries with low or declining birth rates are aligning with countries with high birth rates.
Overcrowded countries are seeing the attractions of sparse populations.
The only viable option today is mutually beneficial arrangements.
Developing countries need ways to rapidly increase their prosperity.
Advanced countries need growth. In the win-win situation, the advanced country gets its growth by participating in the developing county’s domestic market, which has the potential for rapid expansion.
The developing country gets the technology, know-how, and capital that are key to its prosperity and economic development.
Soon, it begins to improve its prosperity primarily through the transfer of product and process technologies.
Sheth and Sisodia argue that this has to happen.
Otherwise, slowing growth in the advanced economies will have dire consequences, as we are already seeing in Europe, Japan, and North America with under-funded pension plans and a social safety net that is collapsing.
Increasingly, new job creation and wealth will come from developing economies.
To understand why this option seems so promising, we have to look back to the time of America’s founding and Adam Smith’s book The Wealth of Nations.
2 Britain was leading Europe into the Industrial Revolution while operating under a protectionist trading policy known as “mercantilism.”
Its focus was on growing its domestic markets and limiting access only to English firms.
Into this setting stepped David Ricardo, an entrepreneur and economist who created the “Theory of Comparative Advantage.”
Under this theory, each nation should concentrate on doing what it does best.
Then it should trade its surplus production to a nation that does something else best.
It made no sense, Ricardo said, to try to use your own raw materials to make all of your own goods, which you sell to your own citizens.
In other words, he was advocating a form of outsourcing.
In the free market system he advocated, money would flow from more advanced to the less advanced economies.
With the flow of capital, the developing economy would move up in the world.
In the first half of the 19th Century, as Britain moved toward that model, it exported technology and capital to underdeveloped nations that had lots of labor and resources.
Premier among those nations was the United States.
Great Britain’s most valuable resource at that time was not a single product, not a raw material, or even finished goods.
It was the Industrial Revolution itself, and England planted the seeds of that revolution across the globe and funded it to create the “global economy” of the time.
Britain invested six million pounds in foreign countries in 1815.
Its investment climbed to 30 million pounds by 1850, and to 75 million pounds by 1870.
It reinvested the profit, providing the engine of economic growth for the world.
Starting from its humble beginnings as an importer of finished goods and an exporter of raw materials, such as cotton, in the early 1800s, the United States was the largest manufacturing empire in the world by the end of the century.
At that moment, Great Britain itself was at the height of its powers, overseer of a fourth of all the people in the world in 1900.
Its economy continued on its path of growth right up until World War I brought a return to protectionism and a shrinking of world free trade.
The end of the war forced countries to focus on rebuilding their economies.
The stock market crash of 1929 marked the end of the original era of laissez-faire capitalism advocated by early economist like Adam Smith and David Ricardo.
This was replaced with a Keynesian mixed economy. Forgetting the lessons of history ? that free markets make nations grow and prosper ? the U.S. raised tariffs to 59 percent in 1930.
Meanwhile, the Communist nations closed themselves and their economies off from the rest of the world. Then World War II devastated Europe.
In the years after the war, economic controls were needed to rebuild wounded nations, including the United States.
But the dominance of that system ended with the fall of the Soviet Union.
Since then, we’ve been moving haltingly toward the reinstatement of David Ricardo’s free market philosophy as the dominant philosophy in economics.
Looking ahead, the Trends editors offer four forecasts for your consideration:
First, by 2025, three great economic networks will emerge to optimize value creation in global free markets.
The U.S. will align with Canada, the U.K., Latin America, and India.
Australia and New Zealand will align with China, Japan, Korea, and the rest of East Asia. And the former U.S.S.R., most of the Middle East, and Africa will align with Europe.
These alliances will be tighter than most of today’s free trade zones, but looser than the EU.
This will change the dominant global pattern of economic flows from east-west to north-south.
The result will be a dramatic worldwide rise in the standard of living.
Second, this tri-polar realignment marks a major turning point in economic history.
The new paradigm will involve advanced nations creating long-term relationships with developing nations based on Comparative Advantage.
The advanced nations will do for developing nations what Great Britain did for the United States after the Civil War:
Build them into robust growth economies.
While the populations of advanced nations are aging, the developing nations have youth, resources, and markets with the potential for explosive growth.
By bringing our high-tech know-how and our infrastructure to them, we can leverage relative strengths and generate prosperity for both.
Third, this realignment will not proceed without glitches and some pain for some people.
We will see instances of protectionism, along with setbacks and battles for turf that will seem like a regression to an earlier era.
For instance, farmers in Japan, the EU, and the U.S. won’t give up their subsidies without a fight.
But, as each member of the tri-polar global economy finds its ideal trading partners, the economic benefits will inevitably encourage more of the same behavior; and global economic growth will favor those who engage in it.
This will result in new economic stability.
Fourth, by 2030, the Trends editors expect participants in all three trading blocs to converge on a free market economic model that resembles that of the United States.
With the exception of Japan, uniquely Asian economic models are missing some elements that make economies work over the long run. In a similar way, the European models, like those of the old Communist bloc, are too socialistic to succeed in the long term.
References List :
1. Tectonic Shift: The Geoeconomic Realignment of Globalizing Markets by Jagdish N. Sheth and Rajendra S. Sisodia is published by Sage Publications Pvt. Ltd. ⓒ Copyright 2006 by Jagdish N. Sheth and Rajendra S. Sisodia. All rights reserved.
2. The Wealth of Nations by Adam Smith is republished by Modern Library, a division of Random House, Inc. ⓒ Copyright 1994 by Random House, Inc. All rights reserved.
