Emerging Markets Reshaping the World

Includes: AFK, EEM, EWZ, FXI, INP, UUP
by: Carnegie Endowment

The rise of developing countries is redefining the global economy. Juggernaut: How Emerging Markets Are Reshaping Globalization, a new book by Uri Dadush and William Shaw, examines the tensions and opportunities that the changing economic landscape will bring.

In a video Q&A, the authors discuss today’s economic trends, the world economy in 2050, and the critical issues that leading countries need to recognize and compromise on in order to ensure greater global prosperity.

How will the rise of the emerging economic powers reshape the world economy?

Dadush: Emerging powers will transform every aspect of global economic interaction. They will become the dominant players in world trade. They will become an enormous source of not just markets for investors but also a source of funds invested in different parts of the world. They are already the major source of migrants, but because of demographics and because they have relatively young populations, they will provide many more migrants. On the negative side, they will also become the biggest source of carbon emissions in the world. In short, around a generation from now, six of the seven largest economies of the world will be developing economies.

What will the world economy look like in 2050?

Shaw: Essentially there will be a few blocks. There will be the United States. There will be Europe. All of the European countries will be relatively small compared to the giants — the United States, China, and India — but together as the European Union, they will still rank as one of the largest groups in the world. Then there will be the two major countries, China and India, which will be two of the three largest economies in the world. We suspect that trade, financial interactions, and all the exchanges that go on in the international marketplace will be guided and determined in a lot of ways by how these blocks work together and how they interact.

What is the importance of international trade?

Dadush: International trade is perhaps the single most important driver of the modernization of the global economy today. Through trade, not only do countries become more efficient because they specialize, but developing countries learn about modern technologies and modern products, and indeed by importing many of those products directly, including sophisticated machinery, etc., they import technology. Through trade you also attract foreign direct investment, because foreign investors like to base themselves in low-cost locales and they like to export from the markets of developing countries. Foreign direct investment also brings a lot of technology and learning.

So for all of these reasons, international trade and its increase lie at the very heart of the process of global economic change, which promises large increases in living standards. Developing countries will become the central players in international trade. For example, the United States will very probably, within a generation or so, be trading much more with China and with Latin America than it does with Western Europe, traditionally its most important trading partner. And Western Europe will similarly be trading more with China and India than it will with the United States.

What are the benefits and potential risks that international integration will have on finances?

Shaw: The benefits will be that there will be tremendous opportunities for investments, for diversification, and for gaining the kind of increases in income you can achieve when you have open capital markets and you have liberalized financial systems. Unfortunately, the risks and the potential costs of that are perhaps even greater and it’s important to remember that while countries like China, India, and Brazil will be big, they’ll also be poor; they’ll be weak in some ways, and the institutions won’t be as strong as many are in the advanced countries.

These countries have been more prone to crisis. And when financial crises occur, poor countries tend to be more penalized because they lack the kinds of fiscal policy space, automatic stabilizers, and regulatory institutions that can cope with dramatic crisis. So, when you have very large countries that are subject to more disasters, you have a recipe for increasing global volatility over the next few decades.

How can the world address climate change?

Dadush: There are two ways of addressing climate change. The most expensive way is to adapt to it. The problem is some industrial countries, particularly those in more northern climates, will have a relatively easy adjustment. If you are in a northern climate and have a relatively high elevation, you’re not going to be terribly worried about a little bit of global warming — two or three degrees centigrade doesn’t sound like much, though actually it is a huge change. And you won’t have to worry about coastal flooding. But if you are a poor country, like Bangladesh for example, which is low lying and in a very hot climate, that will be disastrous. Especially since a country like Bangladesh has very little by way of resources and capacity to adapt.

So adaptation is open for some countries, particularly the wealthy ones.

But the best way to deal with climate change is to reduce carbon emissions. That means changing the way we use energy, finding more carbon-efficient forms of energy and greener technologies. But there are many other things you can do to basically produce the same kinds of goods we produce today much more efficiently, from a carbon point of view, and that is mitigation. And that requires some government action; either imposing a carbon tax or some form of capping emissions and giving the people the right to trade them. One way or another, reducing emissions and mitigating climate change will require international coordination.

What role could migration play in reshaping the world economy?

Shaw: Migration is a mess, at least international migration is a mess. Many of the developing nations have relatively young populations. And even though a lot of them are growing rapidly, the income differential with advanced countries will remain very large. In addition, as their incomes increase — even from low levels — they’ll have greater ability to migrate. So you’ll have increasing pressures for international migration from the poorer countries. At the same time, the aging of the populations of industrial countries is going to increase the demand for migrants. So there are a lot of good reasons why international migration should increase and why it should generate greater benefits over the next two, three, four decades.

On the other hand, the migration regimes in most of the advanced countries are fairly broken. They really haven’t achieved any reconciliation of the conflicts between trying to capture the economic benefits of migration while avoiding what many people perceive as social costs, particularly low-skilled migration. The result has been a lot of illegal migration and loss of control in a sense of migration policy, because they can neither keep everyone out nor keep everybody in.

And the tension between increasing pressure for migration and the ability of advanced countries' policy regimes to really manage it could potentially have very adverse consequences for the advanced countries. They have to choose between a more draconian assault on civil liberties in order to control migrants, or letting everyone in and perhaps losing a sense of their social cohesion. That tension is going to exacerbate over the coming years.

Policy choices in this area are more driven by social values than by economics. The economics are clear: migration is extraordinarily helpful to advanced countries and the United States has a much more dynamic economy because it has a lot of international migrants. At the least you could say that they ought to choose means of control that address the economics of migration and do not treat migration as a crime or a moral issue.

What role will Africa play in the development of the world economy?

Shaw: Africa is certainly a large source of resources and to some extent immigrants. But to a large degree, sub-Saharan Africa has been marginalized because of extreme levels of poverty — almost half of sub-Saharan Africa’s population live at what we call “absolute poverty” or less than $1.25 per day. Weak institutions, poor governance structures, a history of conflict, and a whole host of reasons have also made it very difficult for Africa to effectively have a voice and impact on the global economy.

That is going to change. The rise of the major developing countries — China, India, and Brazil — is going to create opportunities for African economies to export low-wage manufactures as the other economies’ wage levels rise. You can get a lot of investment from these countries as their ability to do so increases. We’ve already seen a lot of that. In order for Africa to capture those benefits, they have to put in place the kind of institutions that some of the other emerging markets have been able to do.

What implications will China’s rise have on America’s influence around the world?

Dadush: Obviously with China rising so rapidly in economic importance, there are going to have to be more compromises — there already are today — about what the United States can and cannot do. Furthermore, the cost of various types of interventions will rise relative to the power of the United States to afford those costs. Simply because the world economy is going to be so much bigger, whatever issue you are confronting will be in some sense more expensive.

But there is nothing inevitable, let’s call it mathematical, about this. Countries have influence in ways that go beyond money or economic capacity. Values that can be projected are tremendously important and whether people like those values and want to be associated with them is tremendously important.

For these reasons, and given the large differences in democracy and governance between the United States today and China, for example, the United States can continue to have a lot of influence for the foreseeable future. But it also faces a major adjustment as it confronts this new reality where it isn’t by far the largest economy in the world.

What is a global conscience?

Dadush: In order for the large countries to strike deals, they will be the decision makers. The decisions are going to be made in Washington and Beijing. They are not going to be made at the World Trade Organization in Geneva or the United Nations in New York. In order for them to strike these deals, they have to bring their people along.

The populations and the local politicians in these countries are going to have to understand why they need to make these compromises so that you can live together in this integrating and faster-growing world. That is what a global conscience is about. It’s about having a greater awareness of the global implications of our actions.

Of course, it’s easier said than done to create a global conscience. But we believe that a combination of education, research, analysis, the workings of civil society, and international dialogue itself, over time, increases the potential of creating a social conscience in the same way that nation states were created in the nineteenth century. And there are indeed national consciences today. And we need to widen them.