GO
Loading...

Globalization to Remain Concentrated in Asia

Laza Kekic|Special to CNBC.com
Sunday, 18 Mar 2012 | 7:15 PM ET

Laza Kekic is the Regional Director for Europe, and Director for Country Forecasting Services The Economist Intelligence Unit for The Economist.

Economic globalisation (defined as the integration of markets across the world) has been one of the most powerful megatrends of the past century.

CNBC.com

However, the global economic and financial crisis of recent years has raised fears of a major backlash against globalisation. Even before the crisis, there had been increased criticism of globalisation, in relation to a range of issues—the environment, democracy, national sovereignty, income inequality and the exploitation of workers.

However, it would be wrong to declare the end of globalisation. A backlash against globalisation and a significant increase in protectionism has so far failed to materialise. Many of the forces that underpin globalisation remain powerful. Businesses continue to depend on expansion beyond their home markets and countries today are more interdependent than in the past.

How much does this matter for future economic development and growth trends? The answer is not self-evident. Much of the evidence is ambiguous. The benefits of globalisation for growth in recent decades have been heavily skewed towards Asia, especially China and India. Indeed, there has been very little improvement in the relative growth rate of most other developing economies, certainly outside Asia, compared with developed economies. It is only in recent years that an appreciable number of emerging markets outside of Asia has been catching up with developed economies.

The critical question is why has Asia been so dominant? What growth-enhancing factors were unique to Asia that were not shared by the rest of the world and that allowed this region to out-perform so much and for such a long period of time?

The answer does not seem completely clear. Many equate the concept of globalisation with free markets, even laissez-faire. But catch-up growth in East Asia was not based on liberal free market strategies. Rather in many cases it was based on extensive state intervention; the emphasis was on "getting relative prices wrong" and on "governed markets". Although East Asian countries were certainly ‘outward-oriented’ in their growth strategies in strong contrast to state-led inward-looking industrialisation common elsewhere, Asian countries were not full participants in the globalisation process at least until the 1990s in terms either of openness to trade or capital movements.

Most empirical studies point to a positive impact of foreign direct investment (FDI) on growth. The same is certainly not the case for other capital flows—here the weight of evidence suggests that there has been no impact or that the effect on growth has been negative. The finding which used to be confined to radical critics of free markets is now also accepted by much of mainstream thinking. On trade, although the evidence is not conclusive (it is often noted that the US was a high tariff country throughout its rise to world economic leadership), on balance the evidence suggests that increasing trade is associated with economic growth. However, in empirical studies there is a problem in identifying the primary direction of causation—does it run from liberalisation and increased trade to output growth or is increased trade the consequence of increased incomes.

What does seem clear is that benefits of globalisation for growth are likely to remain heavily concentrated in the Asian powerhouses implies that over the next 40 years there will be a stunning shift in the distribution of global output. Long-term forecasts suggest that share of world GDP (measured at purchasing power parities) accounted for by North America and Western Europe will be halved from 40% in 2010 to about 20% in 2050, while developing Asia’s share is predicted to almost double from 27% in 2010 to almost a half in 2050.

The share of China alone is projected to increase from 14% in 2010 to 20% in 2050. From a historical perspective, China as the world’s leading economy will, of course, not be a new concept: it was by far the world’s largest economy until the 19th century, accounting for 20-30% of the world’s output; along with India, it dominated the world economy for nearly two millennia before its temporary decline.

Laza Kekic is the Regional Director for Europe, and Director for Country Forecasting Services The Economist Intelligence Unit for The Economist.