Handling the Berlin Wall collapse

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Updated: November 21, 2014 3:48:17 PM

The EMEs have broken a metaphorical wall to edge closer to the advanced economies in the last couple of decades

The collapse of the Berlin Wall on November 9, 1989, was more than a symbolic destruction of a political ideology. While it did herald the collapse of communism, with only a handful of countries embracing this dictum today, the economic transformation brought along by the
assimilation of capitalism in several economies has made the global economy look a better place. However, this transformation has tended to help the emerging market economies (EMEs) more, which took the new route with greater ease, than the developed nations which have
had to deal with the fallout of the Schumpeterian concept of creative destruction more often.

In India, the use of the market mechanism to solve problems, coincidentally, also occurred just after a similar ,though metaphorical, wall crumbled here, though for different reasons. The tenets of globalisation have caught on, but there has been a sea change in the shift of economic power. The overall growth in the world economy this quarter century had averaged a compounded growth rate of 5.5%. Yet, the shift has been more towards the EMEs and while they were buffeted more by the Asian crisis in 1997-98, the seismic zone, as far as growth is concerned, has been located the developed nations, starting with the US, where the derivative bomb exploded, and then the sovereign debt crisis in the EU, cutting through physical boundaries in the eurozone.

The EMEs (taken broadly to include all non-developed nations, as per the classical IMF/World Bank definition) have grown by an average of 9% per annum as against 4.2% for the advanced economies (AEs). While a lower base—with consolidated GDP being just $3.3 billion in 1989 as against $16 billion for the AEs—has helped their cause, their share has increased from 17% to 39% by 2013. Quite clearly, the centre of gravity has moved towards the EMEs, as also evidenced by the power exercised in global forums such as the WTO, where successive rounds of talks have been stymied by these voices arguing for greater equality. The BRICS grouping has become a natural corollary of such power, which appears closer to fruition given the creation of a new development bank.

Hence, globalisation and market-economy, while making the world a flatter place, have directed the winds of interest towards the EMEs, as investors are looking for spare capacity to leverage, and while the AEs are still dominant, opportunity has shifted to these regions. Let us look at FDI for instance. There has been an increase in the share of FDI flows to the EMEs from 16% of total in 1989 to 61% in 2013 of a total of $1,452 billion, with China being the clear leader.

Also, in terms of outward FDI, the EMEs have, quite uncharacteristically, taken over by increasing their share form 8% to 39%. They have also become the holders of a larger share of global forex reserves, from $285 million (out of $840 billion) in 1989 to $8,573 billion in 2012 (out of a total of $11,480 billion). Remittances of migrants have also been in the EMEs’ favour, with their share  being 71% in 2010 as against 53% in 1989. Therefore, both capital and labour have moved in favour of the EMEs.

Partly, this can be attributed to the inherent limitation in the AEs and, going by Rostov’s theory of growth, most of these nations are already in the stage of high mass consumption, with ageing populations. Attention has to shift to the EMEs which are taking-off or  approaching maturity. Amongst AEs, Germany posted a growth comparable to that of the US, at 4.4%, and has borne the brunt of the adjustment process in resuscitating the euro area.

The AEs have witnessed two serious setbacks and are still trying to recover from the twin crises that came in succession since 2007-08. Also, the euro experiment has not quite worked the way in which it was prophesised, leading to introspection on the concept of the unification of 17 currencies of countries that were not looking in the same direction. Along the way, the EMEs have continued on their path—though not consciously coordinated by the disparate nations—to create the ‘de-coupled economy’ which can grow independently fostered by strong domestic impulses and trade ties.

The energy of the US has turned more political in the aftermath of the collapse of the Twin Towers in 2001 and has gotten channelled increasingly into fighting terrorism and maintaining peace (along with UK, which has played a more secondary role) in Iraq, Afghanistan, Iran, Syria, etc. Therefore, the US market—though still a major one for all growing economies, given that China depends heavily on the success of the former—is less likely to distort the growth plans of EMEs.

At the institutional level, the UN has become relatively less relevant with the US taking on the onus of peacekeeper. The IMF which was established to correct fundamental disequilibrium in balance of payments has to reinvent itself as global capital flows do help to correct such imbalances, especially for EMEs. The IMF has been criticised for endangering these countries, where conditional packages have been detrimental to the interests of the latter (Stiglitz). The formation of institutions such as the new BRICS bank pose challenges for the World Bank and its affiliates, as such a bank would be free of the perceived AE biases.

While the world economy appears definitely to be stronger, is it a more equal society? One is not sure about the inequality across nations. Economist Thomas Piketty has argued about rising inequalities since the 1980s. Statistics show that while Britain was five times more prosperous than the poorest nation in the 1820s, today the US is 25 times richer than the poorest nation. The Gini coefficient between countries is now 0.55, which is quite high.

On the whole, it has been a good experience for most nations and forced integration under the pressure of markets has brought about a different kind of unification, which is commendable, coming as it does under the inevitable Smithsonian invisible hand.

The author is chief  economist, CARE Ratings.

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