Global Economic Rebalancing This Century

If China and India continue their trends upward, a more stable and interconnected world order can emerge.

Perhaps the fundamental cause of the 2008 financial crisis and recession was a wide divergence between the West’s willingness to consume and the East’s quick “catching up” in terms of mounting productivity and exports. The decades ahead may see a great economic rebalancing with emerging markets boosting domestic production and relying less on America’s spendthrift.

Wikistrat‘s latest “strategic issue” notes that Western countries are expected to grow about 600 percent in income across the twenty-first century while “the Rest” should roughly double that growth rate — “a very positive trend that directly contradicts the usual doom and gloom concerning a growing have/have-not gap.”

While Europe and the United States are slowly recovering from the recent downturn, countries in Latin America, East and South Asia are booming. The divergence in growth rates is likely to persist as the boomer generation in the West retires and consumption in emerging markets will rise. That is where the bulk of the world’s growing middle class is birthed. The primary question is, will it happen fast enough?

The Chinese national congress in March aimed to enhance internal demand while simultaneously ensuring balanced growth. Hundreds of millions of Chinese remain impoverished while China, too, is facing a huge retirement wave midcentury. Although welfare provisions exist, many Chinese know that they cannot rely on the state for a decent pension, compelling them to save whereas the government would like them to spend. Wikistrat warns that, “absent the rise of adequate social safety nets in China, the public will continue to save an unusually high percentage of its income.”

In the West, meanwhile, investment opportunities are less so easy money finds its way into developing markets, amplifying the risk of overheating. This is probably the largest near term threat to the rebalancing process. “If it were to create an asset bubble in the East and then prick it, the world economy would lose its primary engine of growth right now.”

Yet real estate and infrastructure are natural investments as some three billion people are expected to move into cities between now and 2050 while the planet witnesses its largest population growth ever. Estimates are that by 2030, more than $40 trillion will be spend on electricity, transportation and water infrastructure alone with $16 trillion in Asia, another $16 trillion in the Americas and the rest in Africa, Europe and the Middle East.

The challenge for especially China and India is managing that huge urbanization process while improving the lot of their agrarian populations at the same time. If they succeed in evening out this development, the world logically enters a period of even greater stability than that which it enjoys today. If they fail, it would “rob both of their ability to step up into the role of global superpower,” according to Wikistrat, “thereby keeping too much of the burden on the United States.”