The new face and phase of globalization:

America, Move Over!

by Kumar David

Imagine a world where the Chinese economy is nearly one and a half times larger than the American and India is yapping at Japan's heels for the bronze medal; imagine Russia and Brazil tying with the Germany for the subsequent slots. Imagine also, if you dare, a nuclear armed Iran and a Chinese blue water fleet that can challenge American dominance in the South China Sea and the Pacific. Don't imagine; this is the world that the next generation will inherit within a quarter of a century.

A popular pastime these days in classy economics magazines, imposing think-tanks and even staid locations like the BBC web-site is projecting the shape of the economic and strategic world two and three decades from now. You can play with the parameters a little: Will the Chinese leaders succeed in their efforts to pull the GNP growth rate down from 10% to 6% in say 10 years or will it take longer, can India maintain 7-8% growth, was 3% growth in the US in 2005 an oddity that will correct to 2-2.5% very soon?

Fudging the parameters, this way and that within reasonable bounds, only makes the graphs cross a little earlier or later, or slices the pie-chart and circumscribes the bar-charts at the small-change end. The dominant trend marches on inexorably.

The way it will be

Let us see what the pundits say and allow me to average out the forecasts. Measured in Purchasing Power Parity (PPP) China's GDP will overtake the US between 2017 and 2020, and by about 2030 it will be another quarter as large. India will overtake the US in about 45 years, but this is a very long projection so hang on to the bottle of salt. (A note about PPP is appended at the end for the interested reader). One set of statisticians says that already 80% of the world's consumer-electronics products are made in China while another set write that two-thirds of the world's photocopiers, microwave ovens and DVD players, over half of all digital cameras and two-fifths of personal computers - the last even before Lenovo bought IBM's PC division - are made in China. During 2000-03 China's share of global increases was as follows: GDP-PPP 32%, imports 33%, fixed investments 60% and world oil consumption 36%.While China becomes the workshop of the world India is making advances in IT - not just call-centres and processing of outsourced accounts, but in the creation of high quality software. In both countries a huge corps of relatively cheap but educated, intelligent and nimble manpower is driving a global economic revolution. Growth is lifting billions in these countries out of poverty. (There is also a huge downside - income inequity and neglect of social welfare, environmental damage, corruption and crass consumerism which I have described previously - Sunday Observer of 14 May 2006). The middle-class, using the simple definition of owning an apartment and a car, in China, will outnumber the entire population of the USA within a decade. Now this is power - educated, technologically sophisticated, and ambitious without excessive scruple. The emergence of a middle-class in China for the first time in history, and on this scale, is a profoundly important global event. India already has a large middle-class if education is the criterion. This class will also acquire economic clout in the decades ahead and it already has a head start with English - poor Sri Lanka where English declines! The pace and scope may differ but similar transformations are under way in several other countries such as Vietnam, Brazil and Russia.

It is now commonplace to say that the economic epicentre of the world is shifting to Asia and this, the next tectonic shift after the rise of Europe and America in the last three centuries, is now under way. Underpinning this change is the 'world is flat' thesis (title of Thomas L. Friedman, New York Times foreign affairs columnist's much quoted book). After IT there are no great technological mountains and valleys; knowledge spreads fast and is assimilated easily. In a knowledge based economy all parts of the world are equal, if only educated manpower is in attendance to size it.

Globalisation Phase-II

The nature of the 'globalisation' of the world economy will undergo changes as the centres of rapid growth and economic power shift to Asia and to a lesser degree Latin America and Russia. The process as we presently know it, driven by Western capital and the multinationals and orchestrated by Washington, will give way to globalisation phase-II; multidimensional, thanks to new players who will dilute the power of the West. It is a new ball game and we Sri Lankans know it vaguely, but in our practical actions and preparations the penny has not quite dropped yet.

New global and regional spaces are opening for participation for countries like ours. In the electricity and petroleum sectors China and India have become the principal foreign players in Sri Lanka. Increasingly, for new markets and economic integration we will have to look regionally. What this article has tried to emphasise is that although the explosive growth of the new emerging economic superpowers is much discussed two allied factors of equal importance are not sufficiently cognised. The emergence of a new empowered middle-class, hundreds of millions strong, will profoundly affect the sociology of the world, and secondly the new phase of globalisation will be much different from globalisation as we know it now. The trouble is that our people's movements are too busy fighting old globalisation to appreciate the birth of the new, and the well to do classes have established their business connections to old metropolises, hence the changes are a threat.

The simplest way to state it is that if two countries produce exactly the same quantity, type and quality of goods and services they would be considered to have the same GDP-PPP even if their GDP converted to dollars in the conventional way appeared to be different because of misaligned exchange rates.

Purchasing Power Parity

As a practical measure, the comparison has to be made by considering a standard basket of goods and services (food, durables, housing, transportation, health, education and the like). A family can live on Rs 25,000 a month in Sri Lanka as well as another does in the USA on $1000; but at nominal exchange rates $1000 is Rs 100,000. Nominally, Sri Lanka's GDP is first computed in rupees and then converted to dollars at the official exchange rate; in 2005 it was $20 billion. However the IMF, World Bank and leading economists prefer PPP comparisons and their tabulations carry an additional column in which our GDP-PPP is shown as $80 billion.

The reason for the difference is that there is a big disparity in productivity in the tradable goods sector between advanced and developing economies, but in the non-tradable (service) sector international productivity differentials are not large.

That is to say, although there is a large differential in wages between the two economies this is unjustified by productivity differentials in so far as the non-tradable goods sector is concerned. This protected, artificial, wage differential is why exchange rates misrepresent values. (The Editor of the Sunday Observer and a Professor at Peradeniya are paid a great deal less than their counterparts on the New York Times and snooty Boston although, presumably, they do just as excellent a job!) Theoretically, with perfect market exchange (perfectly priced trade) wage differentials in the tradable goods sectors of two economies should exactly match their productivity differentials.

But when wages in developing countries are forcibly held down below that justified by this differential even in this sector, it makes matters worse. All these discrepancies will, of course, disappear if a free flow of labour between all countries is allowed. Capitalist globalisation refers to free trade and untrammelled investment flows; but free movement of labour? Perish the thought!