CHAP V.
CHANGING BALANCE OF THE GLOBAL ECONOMY
V.0
Introduction
Profound
changes have been taking place in the global economy over the past two decades.
First,
trade and financial linkages between developed countries, the North, and
developing countries, the South, have become much stronger. Second, a number of
developing countries have differentiated themselves from the others in the
South by growing at an extraordinary pace while rapidly integrating them-selves
into the global economy. Moreover, some of these developing economies have
become increasingly important players in the global economy as they have begun
to account for a substantial share of the world output.
Understanding
the implications of these changes is important for the design of macroeconomic
policies and theoretical models. Deeper trade and financial integration between
the North and South can generate faster cross-border transmission of
macroeconomic fluctuations, and therefore, can have implications for
international coordination of economic policies. In regards to the theory, a
better understanding of international economic linkages could be helpful in the
design of dynamic models that can replicate the changing nature of linkages
between the North and South.
As
we review in Section II, there has been a growing empirical research program analysing
the linkages between the developed economies of the North and the developing
countries of the South. Our study contributes to this research program along
several dimensions. First, to have a better understanding of the changing
nature of linkages between these two groups, we examine sectoral interactions
in addition to the conventional macroeconomic channels of interdependence.
The
earlier literature on the North-South linkages has mostly focused on the
channels of transmission considering fluctuations in the standard macroeconomic
aggregates, such as output, consumption, and investment. The sectorial analysis
allows us to study the implications of dramatic shifts across industry, service,
and agriculture sectors that have taken place over the past two decades.
Second,
we employ a comprehensive dataset of 106 countries covering the 1960–2005
periods. Considering the changes that have taken place over this period, we analyse
the North- South linkages in three distinct sub-periods. The first period of
1960–72 corresponds to the Bretton Woods fixed exchange rate regime. The second
period of 1973–85 is associated with a number of common shocks, including sharp
fluctuations in the price of oil in the 1970s and contractionary (and highly
synchronous) monetary policies in major industrial economies in the early
1980s. Finally, the third period, 1986–2005, represents the globalization era
where there has been a substantial increase in the volume of trade and
financial flows.
By
opening their trade and capital accounts during the globalization period, a
number of emerging market economies have differentiated themselves from other
developing countries in the South.3 this observation is directly related to our
third contribution, as discussed below.
In
Section III, we examine how the size distribution of these groups and the
dynamics of sectoral output, trade and financial linkages have evolved over
time. Our results suggest that the Emerging South economies have increasingly
become major players in the global economy because of their rapid economic
growth fuelled by the dramatic changes in their sectoral structure and
international trade and financial linkages. As a result of these changes, the nature
of interactions between the Emerging South and North has evolved from one of
dependence to multifaceted interdependence.
We
turn our attention to the dynamics of growth linkages across these groups in
Section IV.
The
results indicate that there has been a noticeable pattern of convergence within
each group of the North and Emerging South countries during the globalization
period. In particular, growth fluctuations in aggregate output and production
of industry and service sectors across the North countries have become more
correlated. Similarly, the growth rates of output and industrial production of
the Emerging South economies have become more strongly associated with those of
their Emerging Southern trading partners.
Surprisingly,
cross-group correlations of growth fluctuations suggest that the Emerging South
economic activity has appeared to diverge (or decouple) from that of the North
in the globalization period. While these are useful stylized facts about the
transmission of fluctuations across these three groups, understanding the
changing nature of growth spillovers requires a formal framework controlling
numerous other factors. We tackle these issues in Section V.
In
particular, Section V analyses the evolving nature of growth spillovers across
these three groups using a panel regression model that allows us to control for
other growth determinants as well as common shocks. Our results suggest that
the North economies have continued to play a dominant role in explaining the
growth dynamics in the rest of the world during the globalization period.
However, consistent with the stylized facts about the transmission of growth
fluctuations documented above, the impact of the North on the growth dynamics
of the Emerging South has declined in the globalization period relative to the
earlier periods.
V.I
The North-South Linkeges
There
have been three streams of empirical research studying the implications of
increasing trade and financial flows for the nature of cyclical and growth
linkages between the developing countries of the North and the developing
economies of the South. The first stream has merely focused on the changes in
the time-series patterns of the interdependency across the North and South.
The
second stream of the literature has attempted to measure the magnitude of
spillovers between the North and South. The third one has analysed the
determinants of the business cycle co-movement among countries and groups.
V.I.1
Characterizing the North-South Economic Linkages OverTime
Kose,
Otrok, and Prasad (2007) examine the sources of macroeconomic fluctuations in
the developed economies of the North and the developing countries of the South
using dynamic factor models and the series of output, consumption, and
investment for the 1960–2005 period.4 They explicitly separate the group of
emerging markets from other developing economies in the South.
They
find that while the global factor accounts for a smaller share of business
cycle variation in the globalization period, the factors capturing the common
fluctuations in each group have become more important in the groups of
developed and emerging market countries over time. In other words, intra-group
business cycles have become more potent over time in these groups of countries.
Hoffmaister,
Pradhan, and Samiei (1998) analyze the long-run growth linkages between the
North
and South using annual data for the 1967–1993 periods by constructing group
specific output aggregates. They show that despite the long term co-integrating
relationship between the growth dynamics of the two groups, the influence of
the North countries on the output growth of the South countries has declined
over time. They also document a potential structural break in the North-South relationship
around the late 1980s. In addition, they report that the South, especially
Asia, has become more resilient to cyclical movements in the North possibly
because of structural changes that have taken place among the emerging Asian
economies over the last decades.
There
are three papers focusing on the degree of business cycle co-movement across
developed and developing countries using sectoral data. Kouparitsas (2001)
documents various stylized facts about the linkages between cyclical growth fluctuations
of the Northern and Southern sectoral activity for the 1970–1995 period using
annual growth rates.
Loayza,
Lopez, and Ubide (2001) analyze the common economic patterns across countries
in Latin America, East Asia, and Europe for the period of 1970–1994 by means of
an error components model. Their model decomposes annual real value added
growth of GDP, industry, services and agriculture in each country into
international, sectoral, and country specific effects. They find that growth
fluctuations in the European and East Asian countries exhibit a significantly
high degree of co-movement.
V.I.2
Quantifying the Extent of Linkages between the North and South
Some
recent papers examine the role of trade partners’ economic performance in
driving the dynamics of growth. For example, Arora and Vamvakidis (2004) study
the role of trade partners in driving the medium term economic growth using a
fixed effects panel regression model for 101 countries for the period of
1960–1999. They find that the industrial countries of the North benefit from
trading with the rapidly growing developing countries in the South while
developing countries benefit from trading with the relatively high-income
industrial economies in the North. Their results indicate that a one percentage
point increase in the average growth of a country’s trading partners increases
domestic growth 0.8 percentage points over a 5-year period even after
controlling for the global and group-wide trends.6
In
a companion paper, Arora and Vamvakidis (2006) estimate the impact of the U.S.
economy on the growth performance of a large sample of industrial and
developing countries using a fixed-effects panel regression model for the
period of 1980–98. Their results suggest that a one percentage point increase
in the U.S. growth is associated with an average of one percentage point
increase in the growth in other countries even when the non- U.S. world growth
or growth in Japan and Europe is included in the regression.
Helbling
and others (2007) examine the implications of a possible economic slowdown in
the U.S. economy for other countries using a variety of empirical methods. They
find that while the potential size of spillovers from the United States to
other countries has increased with greater trade and financial integration, the
importance of these links should not be overestimated. Spillovers are most
important for countries with close trade and financial ties with the United
States, particularly Latin America and some industrial countries, and they tend
to be larger during recessions, when import growth turns sharply negative, than
during mid-cycle slowdowns.
V.I.3
Determining the Underlying Forces of Business Cycle Co-movement
There
is a complementary strand of literature examining the importance of various
channels underlying the co-movement of business cycles. For example, Frankel
and Rose (1998),
Kose
and Yi (2006) and Baxter and Kouparitsas (2005) find that trade integration
plays an important role in driving business cycle co-movement. Imbs (2004 and
2006) emphasizes the importance of sectoral similarity in addition to trade
flows.
Darvas,
Rose, and Szapáry (2005) and Clark and van Wincoop (2001) provide some support
for the role of policy coordination in explaining business cycle co-movement.
In a recent paper, Akin (2006) provides a detailed analysis of a number of
channels in driving business cycle co-movement. Using the data of a large group
of industrialized and developing economies, she shows that trade linkages,
especially in the form of intra-industry trade, are the main determinants of
cyclical co-movement.
In
addition, there are numerous studies analyzing the dynamics of business cycle
co-movement in certain regions. Rana (2006 and 2007) argues that increased
intra-industry trade flows and financial integration along with monetary policy
coordination in East Asia have resulted in stronger cross-correlations of
business cycles for some countries in the region.
Shin
and Wang (2004) also find that the relationship between trade and business
cycle co-movement in Asia is mainly driven by the extent of intra-industry
trade flows. Kumakura (2006) emphasizes the importance of electronics industry
in driving cross-country business cycle correlations in Asia.
V.II
Evolution of International Economic Linkages
This
section starts with a detailed analysis of the size distribution of countries
in the three groups and their growth dynamics. Next, it examines how
international trade and financial linkages have evolved over time. It then
provides a brief discussion of the implications of these changes for the
traditional models of North-South growth linkages.
V.II.1
Changes in the Size of Distribution of Countries
The
world economy has witnessed a dramatic shift in the size distribution of
countries in the globalization period. To analyze these changes, we first
divide the world (106 countries) into three groups of countries. The North is
composed of 23 “core” OECD countries, the Emerging South includes 23 emerging
markets, and the Developing South contains 60 developing countries. The group
of Emerging South countries constitutes relatively more mature emerging markets
in the sense that they attract the lion’s share of international financial
flows to developing countries.
Available
statistics indicate that during the period of 1960–85, the North economies on
average constituted more than 70 percent of the world GDP (in PPP terms) while
the share of the Emerging South was roughly 25 percent. During the
globalization period, the share of the Emerging South has increased to 34
percent while the Northern share has decreased to 62 percent. The share of the
Developing South has registered a slight decline over time. These changes have
mainly been the result of vibrant growth in the Emerging South in recent decades.
Also,
the average growth in this group of countries has been more than two times
faster than that in the North during the globalization period. The increase in
the share of the Emerging South in the world GDP has been primarily driven by
China and India. For example, China’s share of world GDP has increased
dramatically from 3.17 percent during the Bretton Woods period to 9.79 percent
in the globalization period. Similarly, the share of India has risen from 4.36
percent to 5.61 percent over these periods.
V.II.2
Changes in the Dynamics of Trade and Sectoral Output
V.II.2.1
Trade Openness
There
have been significant changes in the volume and nature of trade flows during
the globalization period. These changes have been fueled by the liberalization
of trade policies around the world and rapid declines in the costs of
transportation and communication.
In
fact, the fraction of countries with a fully liberalized trade regime has
precipitously increased in the globalization period. The measure of trade
openness for the world has been relatively stable until 1985, but then has
gained momentum during the globalization period.
In
particular, the ratio for the Emerging South has risen from 28 percent to 78
percent over this period. Similarly, for the North, the openness measure has
increased from 26 percent to 46 percent during the globalization period. In
contrast, the openness ratio for the Developing South has been rather stable
over time. Relatively high level of trade openness of this group is the result
of its heavy dependence on the exports of primary commodities and fuels.
V.II.2.2
Sectoral Changes
One
particular reason for the dramatic increase in the degree of openness of the
Emerging South is that many economies in this group have pursued aggressive
industrialization policies based on export driven growth strategies over the
last two decades (see Weiss, 2005). In the 1960–1972 period, the average growth
of exports of this group was lower than that of the North, but during the
globalization period, it has been more than two times higher.
These
developments have been accompanied by a substantial reallocation of resources
from agriculture to industry and services.
Research
finds reveals that the North has been rapidly increasing the relative share of
services sector while the Emerging South has been allocating more resources
towards industry and services. These two sectors have been the driving forces
of the growth in the Emerging South. The Developing South, on the other hand,
has continued to retain a relatively large agricultural sector during the
globalization period.
V.II.2.3
Nature of Trade
There
has also been a concurrent shift in the comparative advantage of the Emerging
South from primary commodities to a diversified range of manufacturing
products. The IMF working paper of 2007, documents that during the Bretton
Woods period, the groups of the Emerging South and Developing South have been
similar in terms of the composition of their exports and imports.
In
particular, both groups have mainly been the exporters of primary commodities
with the export share of 60 percent for the Emerging South and 81 percent for
the Developing South while the manufacturing products have constituted the bulk
of their imports. However, in the Emerging South, the share of commodities has
declined to 17 percent while the share of manufacturing exports has rapidly
increased to 74 percent of the total exports during the globalization period.
The
share of manufacturing imports has expanded simultaneously with the growth of
the manufacturing exports in the Emerging South. One of the underlying factors
behind this trend has been the rising intra-industry trade between the North
and Emerging South groups during the globalization period. 12 The
intra-industry trade intensity with the G-7 countries has been higher for the
Emerging Asia in comparison to other Emerging South countries.
The
surge in intra-industry trade linkages between the North and Emerging South has
been partly driven by the relocation of some Northern industrial facilities to
the Emerging South. Increased intra-industry trade with the North has also led
to a significant change in the direction of trade flows around the world. As
shown in Figure 3, the North has remained to be the dominant destination of
global trade flows during the 1960–2005 periods. The share of total world trade
directed towards the Emerging South has significantly increased from 14 percent
in 1985 to 25 percent in 2005. In testimony to the overall trade integration,
the Emerging South has also become an important market for the North by
increasing its share from 13 percent of the total Northern trade in 1985 to 21
percent in 2005.
V.II.2.4
South-South Trade Linkages
The
intensity of intra- and cross-group trade linkages has increased in the South.
For example, the share of intra-group trade in the total trade of the Emerging
South
trade has increased by fourfold from 9 percent in 1960 to 36 percent in 2005.
During this period, the share of the Emerging Southern trade with the North has
declined from 83 percent to 50 percent. Similarly, in the total trade of
Developing South, the share of trade with the Emerging South has jumped from 6
percent in 1960 to 25 percent in 2005. China has been an engine of the growth
of intraregional trade in Asia.
For
example, China related intraregional trade flows grew by 12 times trade
accounting for roughly 60 percent of intraregional trade within emerging Asia
over the period 1990-2006 (see Hori, 2007).
A
significant fraction of intra-group trade flows in the Emerging South has been
driven by intra-industry trade. Table 5 shows that intra-industry trade
intensity of the Asian countries with the Emerging Asia has increased over time
and it has in some cases exceeded the levels of Asian intra-industry trade with
the G-7 in the 1990s. For example, within emerging Asia, China has been
a major player in the growth of intra-industry trade as the index of intra
industry trade intensity between China and emerging Asia has increased from
0.06 to 0.32.
V.II.3
Changes in Financial Linkages
V.II.3.1
Financial Openness
The
growth of international financial flows has overshadowed that of trade flows in
the globalization period. This unprecedented change has been mainly associated
with the rapid liberalization of capital account regimes since 1986. Figure 1
shows that the fraction of countries with liberalized financial systems has
sharply increased in the globalization period.
In
addition, several “pull” and “push” factors have changed the composition of
financial linkages between the North and South during the globalization period.
As a consequence, the composition of capital flows, in particular to the
Emerging South, has rapidly changed, and portfolio-equity and foreign direct
investment inflows have become more prominent.
IMF
displays the absolute level of integration of different country groups into
global financial markets, calculated as the sum of gross international
financial assets and liabilities.
While
the level of integration is clearly highest for the North economies, the
Emerging South countries have accounted for the bulk of the integration experienced
by the South. The gross stocks of assets and liabilities of the Emerging South
has risen by more than fivefold and has been on average an order of magnitude
larger than that of the Developing South during the globalization period.
As
far as the evolution of the composition of total foreign assets and liabilities
for different groups of countries is concerned, among the North economies, the
biggest increase has been in the share of portfolio equity during the
globalization period. The share of debt in gross stocks of foreign assets and
liabilities of the Emerging South has declined from 80 percent to 50 percent
during the same period while the share of FDI and portfolio equity has risen
from a total of 13 percent to 40 percent. The share of portfolio equity has
been rather small in the total stocks of the Developing South. Accumulation of
official international reserves has recently accounted for a significant
portion of the increase in gross foreign assets of the Emerging and Developing
South economies (see Kose and others, 2006).
V.II.3.2
South-South Financial Linkages
Finally,
there are also signs of increasing financial linkages between the Emerging
South and Developing South groups commensurate with the rising importance of
Emerging South in the global economy. For example, intra-South FDI flows
increased by threefold over the period 1995–2003 (see World Bank, 2006; and
Aykut and Goldstein, 2007).
The
share of flows from the Emerging South rose from 16 percent in 1995 to 36 percent
in 2003 in the total FDI flows of the Developing South. These flows have mainly
concentrated in the services and extractive industries backed by various
government incentives for the Emerging Southern multinationals. The Emerging
South banks have also started penetrating into the markets of the Developing
South countries.
V.II.3.3
South-south and Triangular Linkages
In a
broad sense, triangular co-operation may be understood as a type of development
co-operation involving three partners. We focus on partnerships between DAC Donors and Providers of South-South Co-operation to
implement development co-operation programmes/projects in Beneficiary Countries. Triangular
Co‐operation and
Aid Effectiveness
V.II.3.4 Characterize the
North-South Linkages “Theory and Evidence”
The dynamics of linkages between the
North and South have been traditionally described as a form of “unidirectional
dependence” with cyclical fluctuations and growth in the South being determined
primarily by the developments in the North.
According to the standard
North-South model (see Findlay, 1980), the North wields greater economic
influence on the South because of the Southern structural
dependence on the Northern capital goods, finance, technology, and export
markets. The asymmetric interaction between the two groups stems from the fact
that the South is composed of poor developing countries specialized in the
production and export of a narrow range of primary commodities while the North
is composed of rich industrialized economies specialized in the production and
export of manufacturing goods. In this traditional framework, the growth in the
South is driven by the Northern demand for the Southern exports which are used
as inputs in the Northern manufacturing sector. The growth spillovers across
these groups are transmitted primarily through terms of trade fluctuations.
The
rapid diversification of the export base and industrial structure of the
Emerging South towards the manufacturing activity has wide-ranging
implications. For example, it indicates that the pattern of international
division of labor described by the traditional framework has been changing. In
particular, the Emerging South trade with the North has evolved from trade of
raw materials to intra-industry trade where imported manufacturing goods from
the
Emerging
South economies are used as intermediate products in the North. As a consequence
of this, economic spillovers between the North and Emerging South have become
more interdependent. Moreover, there has been a concurrent increase in trade
flows among the Emerging South countries leading to stronger intra-group
spillovers.
The
changes in the volume and composition of financial flows have also affected the
nature of financial interactions between the North and Emerging South groups.
The South experience with financial flows from the North in the traditional
framework was characterized by the dominance of debt flows and official lending
and the sensitivity of these flows to interest rates in the North economies before
the globalization period With the rapid growth of portfolio-equity flows,
fluctuations in financial markets in the North and Emerging South have become
more interlinked as financial flows have become sensitive not just to the risk
and return conditions of the recipient economies but also to macroeconomic
conditions in the North.
In
addition, cross-country international equity holdings have made asset prices in
the Emerging South more responsive to financial conditions not only in the
North but also in other Emerging South economies, as evidenced by the
contagious nature of the 1997–98
Asian
crisis.
In
conclusion, the changes that have taken place in the globalization period imply
that the venues of interaction between the North and Emerging South have become
diversified and the relationship between these two groups has become more
symmetric and interdependent in comparison to that between the North and
Developing South groups. We now turn our focus to the implications of these
changes for the growth linkages across these three groups of countries.
V.II.3.4
The Changing Global Economic Landscape
Driven
by technological changes that have reduced the costs of communication and
transportation, a dramatic increase in the world supply of labor, and a
reduction of trade barriers, broad shifts in economic activity from developed
to developing countries have taken place over the past two decades. The biggest
change involves a long-term shift in economic power from advanced to a handful
of large developing countries that have grown twice as fast as advanced
countries for more than a decade. These rising economic powers have become increasingly
important generators of world economic growth.
Their
share of global trade has increased significantly, with trade and investment
between developing countries (South-South trade and investment) becoming an
important new force in the global economy. These countries now export a
diversified range of manufactured products and are actively upgrading their
ability to produce more sophisticated and higher value-added products.
These
trends have been accompanied by a major shift in the location of manufacturing
from advanced to developing countries, particularly to Asia. Often referred to
as “Factory Asia,” this development has been driven by the proliferation of
global supply chains that rely on significant amounts of goods and services
inputs from different countries, including from the United States.
In
this new environment, countries no longer specialize exclusively in producing
finished products, but rather in specific stages of the production process.
The
rising economic powers have also increased their financial holdings and wealth
and are becoming more important players in international financial markets.
While
a dominant share of financial assets, financial centers, and financial
regulatory power remains concentrated in the United States and Europe, these
emerging economies have accumulated large volumes of foreign exchange reserves,
established sovereign wealth funds, borrowed capital from international
financial markets, attracted foreign direct investment, and begun investing
some of their assets abroad. Corporations based in these countries are playing
an increasingly prominent role in global business and cross-border investment,
often competing with U.S. and European multinationals for natural resources,
technology, and investment in other developing countries. Singapore, Hong Kong,
and Shanghai are growing in importance as financial centers and will perhaps
rank someday with the traditional hubs of New York, London, Frankfurt, and
Tokyo.
As their role in international trade and investment increases, demand
for emerging market currencies is also likely to grow over time, perhaps paving
the way for an international monetary system with more than one key reserve
currency.
As
a result of these changes, the long-standing division between advanced and
developing countries has eroded, particularly for the handful of rising
economic powers. The advanced or developed countries may still be the richest
countries in terms of per capita incomes, but their economies may no longer be
the largest, the fastest-growing, or the most dynamic. This development, in
turn, has implications for U.S. economic well-being and global economic
leadership that are subject to debate. Key changes in the global economy are
documented in more detail below.
V.II.3.5
Measuring the Size of China’s Economy
The
actual size of China’s economy has been a subject of debate among economists.
Many economists contend that using market or nominal exchange rates to convert
Chinese data (or that of other countries) into U.S. dollars fails to reflect
the true size of China’s economy and living standards relative to the United
States. Nominal exchange rates simply reflect the prices of foreign currencies
relative to the U.S. dollar and exclude differences in the prices for goods and
services across countries. To illustrate, one U.S. dollar exchanged for local
currency in China would buy more goods and services there than it would in the
United States.
This
is because prices for goods and services in China are generally lower than they
are in the United States. To make more accurate comparisons, economists attempt
to develop estimates of exchange rates based on their actual purchasing power
relative to the dollar. Such estimates increase the measurement of the size of
China’s economy and its per capita GDP by substantial amounts.
V.II.3.6
Qualifications to the GDP Projections
These
types of GDP projections should be interpreted with caution. Past projections
that Russia and Japan would surpass the U.S. GDP, for example, proved far off
the mark. Some economists argue, in fact, that the correlation between a
country’s growth rate in one decade and the next decade is remarkably low and
extrapolative forecasting can be perilous.
Each
of the rising economic powers faces internal challenges or obstacles that could
easily derail the long-term growth projections. China and India, the two
largest and most important of the rising economic powers, stand in a class all
by themselves both in terms of their potential impact on the global economy and
the obstacles that could derail their growth over the next 40 years.
India’s
internal challenges are no less daunting. To achieve its long-term growth
potential, India may have to make progress on a wide range of economic and
political reforms. According to a Goldman Sachs analysis, India needs to
improve its governance, raise its educational standards, control inflation,
liberalize financial markets and increase trade with its neighbours, boost
agricultural productivity, and improve its infrastructure. Delivery of all of these
changes will not be easy.
It
should also be emphasized that these projections foresee only a relative
decline in the size of the G-7 economies. In absolute and real terms, all the
studies project real increases in GDP for the advanced countries. So despite
rapid growth in the emerging powerhouses, their populations will remain
significantly poorer than those in advanced countries. By 2050, six of the
largest developing countries will have per capita incomes far below Japan, the
United States, and much of Europe. U.S. per capita income will be nearly three
times that of China and eight times that of India, influencing the U.S. role in
a global economy. Therefore, the advanced countries that have dominated the
global economy for the past 50 years will continue to maintain the highest
living standards, but their leadership role may be increasingly contested by a
varied group of rising economic powers.
V.II.3.7
Location of Global Manufacturing and Services
The
location of global manufacturing is shifting from advanced countries to
developing countries, particularly the emerging economies. Industry is
accounting for a growing share of output in emerging economies, rising from
27.9% between 1960 and 1972 to 34.2% between 1986 and 2008, but it represents a
declining share in advanced economies, falling from 33.6% to 28.1% in these
same periods.
At
the same time, industrial activity is growing at a more rapid pace in emerging
economies compared to advanced economies. Industrial output in emerging
economies grew 6.47% from 1960 to 1972, 5.54% between 1972 and 1985, and 6.67%
between 1986 and 2008. This compares to advanced countries’ rates of industrial
growth of 5.41% from 1960 to 1972, 1.65% from 1973 to 1985, and 1.78% for the
1986-2008 period. Based on the information available, a continuing shift of
manufacturing activity toward emerging economies is observed.
V.II.3.9
Globalization of Production and
“Factory Asia”
The
transfer of manufacturing capability from advanced countries to emerging powers
is also documented by the growth in Manufacturing Value Added per capita
(MVA). According to OECD calculations,
the growth in manufacturing value added per capita in the emerging economies
has been in excess of 6% per year since 1990 while the growth rate in advanced
economies has been less than 2%. The authors maintain that there is a link
between countries that have sustained strong growth in manufacturing value
added and in strong economic growth.
The
accumulation of manufacturing value added has been concentrated in Asia.
MVA
per capita has increased nearly six-fold in China since 1990, but it has
stagnated in Latin America and Sub-Saharan Africa. In 2010, China overtook the
United States as the world’s largest producer of manufactured goods with a
market share of 19.8%, just slightly larger than the U.S. share of 19.4%
The
concentration of manufacturing in Asia (often referred to as “Factory Asia”)
has been driven by outsourcing and off-shoring of production. Instead of
concentrating on producing the total value of the product with domestic inputs,
“Factory Asia” is characterized by fragmentation of production and supply
chains incorporating a substantial amount of value added from each country
involved, including the United States.
The
globalization of production, of course, is not particular to Asia. As
illustrated by the production of the Boeing 787 Dreamliner, parts for
major capital and consumer products are increasingly sourced on a global basis.
What the diagram does not show, however, is that the growing tendency of
companies to contract out to other companies for the production of components
and services can run into problems. In the case of the Dreamliner,
Boeing’s decision in 2003 to contract out or outsource substantial production
proved problematic. Many parts did not fit together and dozens of
sub-contractors failed to deliver their parts on time, resulting in cost
over-runs and a three-year production delay.
China,
as the hub of “Factory Asia” has become competitive not only because of its
lower labor costs, but also because it is a huge importer of sophisticated
components from other East Asian countries for assembly and re-exports to
Western markets. Its integration into global production networks is reflected
in the fact that it runs bilateral trade deficits with nearly all East Asian
countries and bilateral trade surpluses with most developed countries particularly
the United States and European countries.
Recognizing that their days as the lowest-cost
producers of manufactured goods may not last forever, China and India are
actively trying to upgrade their ability to compete in higher value added
segments of manufacturing the design, innovation, and marketing of products by
increasing support for research and development and technological
acquisition.20 For example, since 2000, China has invested 1.4% of its GDP in
R&D and India has invested 0.8%. China and India are increasing their
R&D expenditures at over 8% per year, while U.S. expenditures are projected
to increase by around 2%.21 The World Bank study maintains that “the location
of major research facilities in China by Microsoft, the invention of Nano
micro-car by Indian firm Tata, and the continued string of aeronautical
breakthroughs in Russia suggest the emerging-economy giants’ strong potential
for fostering growth through technological advancement.
V.II.4
New Patterns of International Trade Flows
Substantial
changes in the patterns (shares, direction, and composition) of international
trade flows are an important element of the changing global economic landscape.
These changes are associated with the liberalization of trade policies around
the world, export-led growth strategies of developing countries, the rapid
declines in the costs of transportation and communication, and the impact of
supply chain production and growing prominence of multinational corporations (MNCs)
in world trade.
According
to the Brookings Institution study Emerging Markets, the emerging
markets as a group became much more open to international trade (as measured by
the ratio of total trade to GDP) over the past 25 years. Trade liberalization
or reductions of trade barriers implemented either unilaterally or as a result
of multilateral negotiations have increased their exposure to trade. Since
1985, the trade openness ratio of these economies has increased from less than
30% to around 80%; the similar measure for advanced countries increased from
26% to 46%. During this period, the average growth rate of exports for emerging
markets was two times greater than for advanced economies. Trade flows have
thus been very important for integrating emerging economies into the global
economy.
V.II.4.1
International Finance
V.II.4.1.1
Strengthening International Frameworks for Financial Integration
Strengthening
international frameworks for financial integration may become more important
with growing global interconnectedness, particularly with developing countries’
rising role in foreign direct investment, bank loans, and portfolio flows.
While the increasing weight of developing countries in global asset portfolios
will help residents of advanced countries earn higher returns on their foreign
investments and improve diversification, a financial crisis in either
developing or advanced countries is likely to have global repercussions, as the
Asian financial crisis in the late 1990s and the 2008-2009 financial crisis
demonstrated. As these countries grow much larger, the risks remain as their
financial sectors are still small and relatively undeveloped.
Thus,
it may be in the interest of advanced countries to support improvements in the
institutions and rules to ensure prudential risk-taking including capital
requirements, limitations on the kinds of business commercial banks can
conduct, transparency requirements, and rules governing derivative
requirements. To move in this direction, developing countries may need to be
part of any rebalancing of the global financial regulatory landscape.
The
Basel 3 capital accord, announced in 2010, may be the last prominent piece of
international financial rulemaking whose negotiation took place mainly among
developed countries. Several financial bodies, including the Basel Committee
and the Financial Stability Board, have now enlarged their membership to
include many of the rising economic powers.
Incorporating
the rising economic powers into global financial bodies may not be easy. As in
the trade arena, some emerging powers are quick to see the opportunities, but
not the responsibilities it creates for them. Some observers suspect that
Western-driven regulation may be a way for the more established financial
centers and firms to freeze the competitive playing field and prevent the rise
of new entrants. On the other hand, some in the United States and Europe fear
that as they re-regulate their financial systems as a consequence of the
crisis, developing countries could attract business “unfairly” based on less
demanding rules.
V.II.4.1.2
Rules for Foreign Direct Investment and rate of exchange
Beginning
with a League of Nations conference in 1929, there have been many unsuccessful
efforts to negotiate a multilateral investment framework. Difficulties in
achieving consensus across different levels of economic development and
different definitions of investor rights and protections are some of the
reasons past efforts have been unsuccessful.
The
rapid increase in FDI flows since the early 1970s, combined with the growing
importance of developing country multinationals, could, however, increase
support for another attempt at establishing a multilateral framework for
foreign investment. This view assumes that as the importance of foreign
investment grows for developing countries and developing country multinationals,
the need for a multilateral framework that provides adequate legal protection
for foreign investors will become more apparent to many of the stakeholders who
have opposed such attempts in the past.
In
the absence of a multilateral framework on foreign direct investment flows,
bilateral investment treaties (BITs) have proliferated worldwide and become the
dominant mechanism governing such flows. Over the past three decades, the
number of BITs negotiated has increased more than tenfold, rising from about
200 in 1980 to 2,275 in 2007. Investors’ contractual rights, allow for
repatriation of profits, and provide a mechanism for disputes and international
arbitration. While BITs, on balance, may improve the investment climate, the
large number of BITs arguably increases the complexity of rules for foreign
investment and the costs of compliance.
In most of underdeveloped countries we
face money depreciation.
In what concerns the rate
of exchange, we should distinguish between the real rates of exchange and
nominal rates of exchange. A nominal rate of exchange is the relative cost
between 2 countries. For instance (1$→750→) certain quotation of foreign
currency with local currency, the opposite is called uncertain quotation 750
Frw= 1$
1Frw= 1/750= 0,001333333.
However, the real rate of exchange is the relative cost of goods between two
countries and it is calculated in the following way.
Real rate of exchange=
RRE=
E.g.: A car coats 1500 US $ in the USA,
Currency Exchange is 1$= 750 Frw
A car coats 1,050,000 Frw
in Rwanda without Taxes and others Expense, Transportation from USA up to
Rwanda is 500.000 Frw, Taxes and Others Expenses 500.000 Frw
After Giving the Value of
this car in Rwanda Calculate the Real Rate of Exchange?
The Value of this Car in
Rwanda is 1.050.000+500.000+500.000= 2.050.000 Frw
750 Frw= 1$, 1 Frw=
,
1 Frw = 0,001333333$
Real rate of exchange (RRE)
=
0,001333333$*2.050.000/1500= 1.82. When RRE is 1, this
means that the good is expensive inside the country.
The Nominal Rate of Exchange NRE is an
average annual rate of the official market in terms of national currency
compared to a foreign currency of reference , there the US $.
Fluctuations of change are everywhere
the characteristics of developing countries (DC). There often exist currency
fall in value in that country.
V.II.4.1.3
Operation of Sovereign Wealth Funds and State-Owned Multinationals
Operating
as investment funds owned and managed by national governments, sovereign wealth
funds (SWFs) have been created since the 1950s by oil- and resource-producing
countries to stabilize their economies against fluctuating commodity prices and
to provide a source of wealth for future generations.
More recently, the shift
of wealth from advanced countries to emerging economies in which governments
play a large role in the management of economic activity has allowed a number
of countries, mostly Asian (China, Japan, Singapore, and Korea), to create SWFs
by diverting foreign exchange reserves from other than natural resources
proceeds. The fact that the policies that led to some of the accumulations of
foreign exchange reserves have been internationally criticized suggests that
the activities of these SWFs will be more closely scrutinized than the SWFs of
other countries.
While
the standard objective of most SWFs is to maximize their “risk-adjusted
financial return” by investing in a broader array of assets than U.S. Treasury
bills, concerns have surfaced that such investments may also be motivated by
pursuit of national political or economic power. Some U.S. policymakers have
expressed concerns that countries will use SWFs to secure strategic assets
around the world in areas such as telecommunications, energy resources, and
financial services.
Some
of these concerns may have lessened in recent years due to the adoption in 2008
of voluntary guidelines by 26 countries, including China, Singapore, and South
Korea. Known as the Santiago Principles, these guidelines seek to increase the
transparency and disclosure requirements of the SWFs. However, the size of some
Asian SWFs alone (e.g., China Investment
Corporation
has $332 billion in assets and Singapore’s Investment Corporation has $248
billion) suggests these concerns will not disappear quickly.
Some
of the same issues may arise regarding state-owned multinational companies.
While there is no reason on the surface that firms such as China’s Lenovo should
be treated any differently by host country national authorities, the implicit
backing that these firms have from their governments may give them some unfair
advantages in terms of financing and market power.
V.II.4.1.4
Future of the Dollar as the Primary Reserve Currency
Since
the United States emerged as the world’s preeminent power a century ago, the
dollar has become the world’s main currency for carrying out international
transactions. Oil and virtually all other commodities in international markets
are bought and sold in dollars. In addition, the dollar is the main currency in
which most countries hold their monetary reserves an arrangement that has costs
and benefits for the United States.
The
ongoing shifts in the balance of international economic power, however, are
raising questions about the continued dominance of the dollar. China and
Russia, two rising economic powers, have called for an end to the long reign of
the dollar as the world’s reserve currency. They argue that an international
monetary system in which the dollar, the euro, and China’s Ren Minbi (RMB)
share the reserve currency role will be an improvement over the system where
countries seeking to accumulate reserves have no alternative to accumulating
dollars.
In 2010, the RMB played a negligible role in
global currency markets, accounting for less than 1% of foreign exchange market
turnover. By contrast, the U.S. dollar figured in 85% of transactions, the euro
in 39%, and the Japanese yen in 19%. The RMB clearly has years to go before it
reaches the market level with secondary currencies like the Australian dollar
and Swiss franc, let alone joining the ranks of major currencies.
Functioning
of the Global Economy: Reform of the Bretton Woods Institutions
The
United States was a prime mover in the creation of the so-called Bretton Woods
international economic institutions, including the IMF, the World Bank, and the
General Agreement on Tariffs and Trade (now the World Trade Organization) more
than a half-century ago. These institutions, premised on the values of open
markets, trade liberalization, financial stability, and the rule of law, were
designed to promote post-war reconstruction and a prosperous and stable global
economy.
The
current shift in economic and political power has occasioned a debate on the
reform of these institutions, as well as on the very foundation of the
post-World War II open global international economic system. Many rising
developing countries want more power and influence in setting the rules and
institutional arrangements of the world economy. They see existing arrangements
as preserving the status quo and maintaining U.S. and, particularly, European
power at the expense of developing countries.100 although the IMF and World
Bank have taken some steps to increase representation to reflect the shift in
economic power toward developing countries, many rising powers remain
unsatisfied.
It
remains to be seen whether and how the governance and functioning of these
institutions for international cooperation can be reformed to become more
representative of the new global landscape while retaining Western norms and
values. The establishment of the G-20 as the principal forum of international
policy coordination is deemed by many observers as the most promising
recognition of the problem and institutional response to date. Most proposals
to provide greater representativeness to these institutions call for European
countries, and not the United States, to give up some of their power.
The
WTO is in a unique position given that it is the only Bretton Woods institution
to use the principle of “one country, one vote.” While this is a strength from
the point of view of democratic representation, it also makes decision making
more cumbersome.
V.II.4.1.5
Role of the G-20
Established
initially in 1999 to facilitate discussions among finance ministers, the G-20
started meeting at the leader level (Summits) in September 2009 in response to
the global financial crisis. The crisis
starkly illustrated the need for fiscally strapped advanced economies to rely
on increases in government spending from cash-rich developing countries to keep
the global economy from entering into a depression. Representing two-thirds of
the world’s population, 90% of world GDP, and 80% of world trade, the G-20 has
come to symbolize the growing diffusion of economic power and the fact that the
advanced countries do not have the capacity to manage global economic problems
alone.
With
much broader representation than its predecessor coordinating groups (the G-7
and the G-8), the G-20 has the potential to fill a large gap in global economic
governance by creating coalitions that cut across advanced and developing
country lines. Working groups on issues such as global imbalances are
co-chaired by representatives from both camps, thereby giving each side
opportunities to develop reforms and establish buy-in among their respective
constituencies. In addition, the G-20 has pushed other international
institutions to increase the representation of developing countries.
To
strengthen international standards of global finance, the G-20 replaced the
Financial Stability Forum, which included only G-7 members, with the Financial
Stability Board, which included developing countries. And the G-20 has worked
to ensure that developing countries gain greater representation at the IMF and
World Bank and that the Doha Round of multilateral trade negotiations be brought
to a successful conclusion.
While
the G-20 has received high marks for its response to the global economic crisis
through its decisions regarding fiscal stimulus, regulatory reform, and a
tripling IMF’s resources, it is uncertain that such a diverse grouping of
leaders will be able to reach agreements on global economic issues that tend to
be viewed in “win-lose” terms. It is also unclear how the G-20, by including
only the large rising economic powers, can support multilateralism. Moreover,
given that the G-20 lacks enforcement powers and a permanent institutionalized
bureaucracy, commitments agreed to at summits can easily be ignored or remain
unimplemented. To wit, despite several G-20 declarations urging a rapid
conclusion of the Doha Round of trade negotiations, the stalemate endures.
V.III Globalizations
Globalization is the process of international integration arising from
the interchange of world views, products, ideas, and other aspects of culture. Globalization describes the interplay across cultures of
macro-social forces. These forces include religion, politics, and economics.
Globalization can erode and universalize the characteristics of a local group.
Advances in transportation and telecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities.
Though several scholars place the
origins of globalization in modern times, others trace its history long before the European age of discovery
and voyages to the New World. Some even trace the origins to the third millennium BCE.
Since the beginning of the 20th century, the pace of globalization has
proceeded at a rapid rate.
The term globalization has been in
increasing use since the mid-1980s and especially since the mid-1990s.
In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade
and transactions, capital and investment movements, migration and movement of
people and the dissemination of knowledge.
Further, environmental challenges
such as climate change, cross-boundary water and air pollution, and over-fishing
of the ocean are linked with globalization. Globalizing processes affect and
are affected by business and work organization, economics, socio-cultural
resources, and the natural environment.
Humans have interacted over long
distances for thousands of years. The overland Silk Road that connected Asia, Africa and Europe is a good example of the transformative power of
international exchange that existed in the "Old World".
Philosophy, religion, language, the
arts, and other aspects of culture spread and mixed as nations exchanged
products and ideas. In the 15th and 16th centuries,
Europeans made important discoveries in their exploration of the oceans,
including the start of transatlantic travel to the "New World" of the Americas. Global movement of people, goods, and ideas expanded
significantly in the following centuries. Early in the 19th century,
the development of new forms of transportation (such as the steamship and railroads) and telecommunications that "compressed" time and space allowed for
increasingly rapid rates of global interchange.
In the 20th century, road
vehicles and airlines made transportation even faster, and the advent of
electronic communications, most notably mobile phones and the Internet, connected billions of people in new ways leading into the
21st century.
V.III.2 Brics
originally "BRIC" before
the inclusion of South Africa in 2010, is the title of an association of emerging national economies: Brazil, Russia, India, China and South Africa. With the possible exception of Russia, the BRICS members
are all developing or newly industrialised countries, but they are distinguished by their large,
fast-growing economies and significant influence on regional and global
affairs. As of 2013, the five BRICS countries represent almost 3 billion
people, with a combined nominal GDP
of US$14.9 trillion, and an estimated US$4 trillion in combined foreign
reserves. Presently, South Africa holds the chair of the BRICS group.
In 2012, Hu Jintao, who at the time was President of China, described the BRICS countries as defenders and promoters
of developing countries and a force for world peace. However, some analysts
have highlighted potential divisions and weaknesses in the grouping, such as
India and China's disagreements over territorial issues, slowing growth rates,
and disputes between the members over UN Security Council reform.
The foreign ministers of the initial four BRIC states (Brazil, Russia, India, and
China) met in New York City in September 2006, beginning a series of high-level
meetings. A full-scale diplomatic meeting was held in Yekaterinburg, Russia, on May 16, 2008.
V.III.2.1 First BRIC summit
The BRIC grouping's first formal summit commenced in Yekaterinburg on June 16, 2009, with Luiz Inácio Lula da Silva, Dmitry Medvedev, Manmohan Singh, and Hu Jintao, the respective leaders of Brazil, Russia, India and China,
all attending. The summit's focus was on means of improving the global economic situation and reforming financial institutions, and discussed how the four countries could better
co-operate in the future. There was further discussion of ways that developing countries, such as the BRIC members, could become more involved in
global affairs.
In the aftermath of the
Yekaterinburg summit, the BRIC nations announced the need for a new global reserve currency, which would have to be 'diversified, stable and
predictable' Although the statement that was released did not directly
criticise the perceived 'dominance' of the US dollar
something that Russia had criticised in the past it did spark a fall in the
value of the dollar against other major currencies.
V.III.2.2 Entry
of South Africa
In 2010, South Africa began efforts
to join the BRIC grouping, and the process for its formal admission began in
August of that year. South Africa officially became a member nation on December
24, 2010, after being formally invited by the BRIC countries to join the group.
The group was renamed BRICS – with the "S" standing for South Africa to
reflect the group's expanded membership. In April 2011, the President of South Africa, Jacob Zuma, attended the 2011 BRICS summit in Sanya, China, as a full member.
V.III.2.3 Developments
The BRICS Forum, an independent
international organisation encouraging commercial, political and cultural
cooperation between the BRICS nations, was formed in 2011. In June 2012, the
BRICS nations pledged $75 billion to boost the International Monetary Fund's lending power. However, this loan was conditional on IMF voting reforms. In late March 2013, during the fifth BRICS
summit in Durban, South Africa, the member countries agreed to create a global
financial institution which would rival the western-dominated IMF.
V.III.2.4 Summits
The grouping
has held annual summits since 2009, with member countries taking turns to host.
Prior to South Africa's admission, two BRIC summits were held, in 2009 and
2010. The first five-member BRICS summit was held in 2011. The most recent
BRICS summit took place in Durban, South Africa, in March 2013.
Author Prof. Dr. Rugema D. Muyombano
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