Global economic power shift:

Growth in Asia and the fall of the West

By Gamini Warushamana

There is a global economic power shift from the West to the East. It is a historic change and events taking place in trade, investment and on other fronts of the world economy are not isolated, said Dr. Sirimal Abeyrathne of the Economics Department of Colombo University in an interview with the Sunday Observer.

Excerpts of the interview:

There is a prolonged recession in the US, Europe and Japan while we can see fast economic growth in emerging economies, especially in the East and South East Asian countries. These are two sides of the same coin and not two isolated scenarios.

If we look back, about 100 years ago, the world economic power was the UK. During the Second World War and thereafter the major issue confronting economists was why economic growth in the UK was declining while the US economy was growing fast. It was a time of an economic power shift from the UK to the USA. The present scenario can also be identified as shifting of world economic power. The world production base is now shifting from the West to emerging economies, especially to the East and South East Asia. However, South Asia was not fortunate to gain from this shift.

In the 2008-2009 global economic crisis, the world lost assets worth ten times the US GDP and all these losses were from advanced economies. Growth rates of developing countries slowed down but did not become negative. This means that progress did not slow down and emerging economies continued to progress during the crisis.

After the end of the recession, capital flow from the West to the East accelerated. In some advanced economies recession has been continuing for decades and for instance Japan, has been in recession from the 1980s.

On the other hand, from the 1980s the economies of developing countries in Asia began picking up. There was consistent policy reform in these countries and as a result capital flow from the West to the East started.

After the 2008-2009 global economic crisis there was an exponential capital outflow from advanced economies in terms of FDIs and portfolio investment. Today, over US $ 1 trillion in capital flows out per year from OECD countries and it was only around US $ 230 billion in 1990s and only about US $ 50 billion in the 1980s.

This trend is witnessed in the pattern of the FDI flow too and earlier FDI mainly flowed within developed countries. Out of the total global FDI flow, 70-80% was within advanced economies and it was their own business. Today, this has changed and for the first time in 2012, FDI flow to developing countries exceeded FDI flow within developed countries.

In 2012, of the total FDI outflow from developed countries, 60% has been received by developing countries. We do not feel this because we get nothing. Not only capital flow, there are other indicators that show this economic power shift. For instance, today half of the world's exports come from developing countries.

Export volume and pattern has also changed. Today exports from the East and South East Asian countries are characterised by trade in task rather than trade in finished goods.

Today, in a manufactured export item you can't find a specific country that has made it.

It is made in the world or known as multi-location production. For instance Apple iphone is a US product. But the US imports it from China and, therefore, it is an export from China. But China only assembles it and value addition in China is less than 5%.

Components of the iphone, produced in many countries, are brought to one place and assembled. This is the emerging trade pattern in Asia. However, this is still new to South Asia and our trade pattern has not yet changed.

Multi-national companies and their technological advancement facilitate this trade pattern.

Their research and development has enabled product fragmentation and they outsource different tasks to different countries and get cost advantage.

Therefore, they bring their capital to these emerging economies and this is one reason for the change in capital flow.

Development in the transport and communication sectors and resulting cost declines facilitate this new trade pattern. Multi-location production and movement of components to assembly plants in another country is possible because transport cost is not a big issue today.

Labour which is abundant in countries such as China and Indonesia are used for assembling industries while Philippines and Malaysia cater for intermediate products. Developed countries too retain the production of some advanced parts in their hands.

If you analyse all these events together you can see that they are well connected and there is a shift in global economic power. South Asia as a region has not integrated to this economic power shift and is at a slow pace of development.

South Asia has not attracted global capital. There are several reasons for this. India is not playing its role as other leading East and South East Asian countries.

The business environment is not conducive in the region compared to these emerging economies.