The shifting global economic architecture

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: The overarching theme of World Economic Forum’s Annual Meeting in Davos, Switzerland, is “The Shifting Power Equation”. Participants will try to make sense of the various ways that power is being transferred and redistributed in our ever more connected global polity. One manifestation of this shift is the changing global economic architecture. There is a fundamental transfer of power that we are witnessing: the rise of some new economic and geopolitical powers at the same time that globalisation becomes more widespread. These trends are challenging societal norms and reshaping relations between states, markets, companies and consumers. And while the past half decade has witnessed strong global growth, shifts in global economic power are creating new uncertainties in how global economic growth will be managed and maintained.

The rise of China, India, other Asian economies and other emerging market economies is a major watershed for the global economy, perhaps—as Larry Summers put it last January in Davos, the most important event in human history in the last 1,000 years after the Renaissance and the Industrial Revolution. In Chindia, 2.2 billion people are starting to join the global labour force. This is a massive challenge of integration with the global economy.

The rise of the BRICs is already having vast effects on many aspects of the global economy and can explain some recent economic puzzles: the bond market conundrum, as a partial excess of savings in China, Asia and oil exporters (together with a massive accumulation of forex reserves by emerging markets) as kept global long term interest rates low; the fall in inflation of goods prices, in spite of high global growth as cheap Chinese and Asian goods have kept a lid on inflation; the rise in commodity prices, driven by Chindia and emerging markets demand; the fall in real wages of unskilled workers in advanced economies; the rise of global imbalances. These can all, in part, be attributed to the rise of emerging market economies.

With economic power —emerging markets accounting for a larger share of global GDP — also comes political power, as the rising influence of China and India on geopolitical affairs clearly shows. Thus, the old governance of the global economy based on the G7 club of advanced economies is obsolete. China, India, Brazil, Russia and other crucial players need to be brought to the table of international policymaking.