We have grown up in a world with Western Europe and the United States at the center. This worldview is now outdated; a new economic order emerges with an ever-growing “world outside the West”. Asia’s economic progress is the most striking feature, but in the last decade other regions have also signed up.
- How is the economic power shift expressed?
- What will be the consequences of the economic changes?
- Will the increased economic power of China and other emerging economies also be reflected politically?
- Will the growth pattern of the last decade continue so that poor countries become history?
The analysis in the article is based on comprehensive data sets for international trade and economic growth (GDP) where the world is divided into nine geographical regions (North America, Latin America, Western Europe, Central Europe, the former Soviet Union, the Middle East, Africa, Asia and Oceania / Pacific Ocean).
2: Two key economic trends
For both trade and economic growth, there are two “pillars” in the development:
- For fifty years, there has been faster growth in Asia, especially Eastern Asia, and relatively lower growth in Western Europe. This is reflected in growing shares of the world economy for Asia and declining shares for Western Europe.
- The second component is faster growth in low- and middle-income countries outside Asia , and industrial decline for the United States . This has happened since the late 1990s.
Growth in Asia has largely been driven by increased production of industrial goods . Growth in other regions of developing countries over the past decade has been driven in part by higher commodity prices. Since commodity prices have historically varied greatly, it is uncertain how lasting the trend is for the developing countries that primarily export commodities.
3: Shares of the world economy
A country’s value creation is often measured in GDP ( gross domestic product ). However, if we compare GDP in different countries on the basis of ordinary exchange rates (eg Norwegian GDP calculated in kroner and then converted into dollars), we overlook the fact that the price level varies from country to country: For a dollar we can buy more in China than in the USA or Norway. In particular, rich countries often have high price levels, while poor countries tend to have low prices. If we disregard the price differences, the difference between poor and rich countries is overestimated .
Most people therefore agree that it is best to use purchasing power-adjusted measures for GDP (GDP-K) if we are to compare real incomes in different countries. We can therefore call it GDP-K , unlike GDP-N which emerges if we convert at ordinary exchange rates (eg from Chinese yuan to dollars). To calculate GDP-K, one must collect price data from many countries and construct “artificial exchange rates” that adjust for the differences in price levels. This is easier said than done; we return to the measurement problems that then arise.
The well-known researcher Angus Maddison (died 2010) created a data set for GDP-K in many countries until 2008. Figure 1 shows the shares in the world’s GDP-K for Western Europe, North America and Asia in the period 1950–2008. Growth for Asia has been formidable : from 17 to 40 percent. For North America and Western Europe, it was a decrease from 56 to 39 percent. While Western Europe’s share has fallen since 1960, North America kept pace with the world economy in 1970−2000; Then the curve has pointed downwards for them as well.
4: Shares of world trade
The picture is the same for world trade in goods (see Figure 2): The redistribution between Asia and Western Europe in the production of goods is also significant for trade ; down from 47 to 30 percent for Europe, and up from 12 to 31 percent for Asia. Also in this case, North America keeps pace with the world economy until 2000 – then it goes downhill. It is especially US exports that have lagged behind. Over the past decade, the country has developed a significant trade deficit , not only with China but with a number of countries.
The “other” curve also illustrates the increase in world trade for the other six geographical regions over the past decade, including Central Europe, Africa, the former Soviet Union and South America. These are the same regions that – in addition to East Asia – have had faster economic growth.
5: Industry-driven or commodity-driven growth?
After 1945, Western Europe and North America were for a time the world’s suppliers of industrial products, but Asia quickly took over. And as early as 1970, all three regions were established as industrial giants . Central Europe was then in an intermediate position, but this region has since 1980 taken the step up in the group of industrial exporters. For the other five regions of the world, trade growth has been dominated by commodities. In the period 1998−2008, there was strong growth in commodity prices , and this benefited many exporting countries.
Rising commodity prices in the 1970s and in the 2000s are thus the main reason why the curve for Andre in Figure 2 is S-shaped. If we divide world trade into industrial goods and other goods (mainly raw materials), we find a somewhat opposite pattern: The share of industrial goods fell in the 1970s and the last decade, but rose in the intervening period.
6: Long-distance or short-distance goods
Trade in industrial goods is more “short-haul” compared with trade in raw materials. More of the trade in industrial goods takes place over shorter distances and between countries within the same geographical region . For industrial goods, there is also more “business-internal” trade, ie two-way trade in similar goods, such as when Germany and France “exchange” VW for Peugeot.
In the world economy, we now have four regions that have a large share of industrial goods in exports: North America, Western Europe, Asia and Central Europe. These have large exports and large imports of industrial goods, and thus a lot of internal trade.
Since industrial trade is more short-lived, the four industrial regions – especially Western Europe and Asia, which include many countries – also have a lot of intra-regional trade (trade between countries in the same region). In 1970, internal trade in Western Europe accounted for as much as 29 per cent of world trade; This share had fallen to 17 per cent in 2010. Not surprisingly, intra-regional trade in Asia was one of the fastest growing parts of world trade – with a share rising from 4 to 16 per cent.
In contrast, we find the commodity-exporting regions, which mainly export commodities and import industrial goods. For these, trade is more “long-distance” and across regions, and there is little trade within the regions. An extreme case is Africa
While Africa’s share of world trade has increased over the past decade, intra-African trade, between the 54 countries, remains minimal; 0.4 percent of world trade in 2010. The lack of internal integration in Africa is one of the obstacles to the continent’s development. There is also a reason why, among other things, the World Bank prioritises infrastructure in its support for Africa. As we have seen, industrialization is also a source of “short-haul” trade, so the lack of internal trade in Africa is also due to weak industrial development.
7: Western Europe vs. Asia: some differences
To a certain extent, Asia is now doing what Europe did before, with growth driven by industrialization and with an important role for intra-regional trade. However, there are some important differences:
- After 1945, the countries of Western Europe were more equal in terms of level of development. In Asia, development has taken place in waves , with countries at different levels of development. Japan came first, then the “tigers” (Hong Kong, South Korea, Singapore, Taiwan) and some ASEAN countries (Thailand, Malaysia, Indonesia), then China and now (hopefully) India.
- Developments in Europe accelerated during a period when companies were more national , while Asia’s development is characterized by multinational companies , international investments and production networks across countries, supported by modern information flow rather than fax. In Asia, more of the intra-regional trade is of the type “cars against car parts” rather than “cars against cars”.
In Western Europe, trade and integration were stimulated by political integration, through the formation of the EEC, EFTA and later the EU. In Asia, this type of political integration has been more half-hearted, so that economic development takes precedence over politicians.
The historical background has also been different. The countries of Western Europe managed to put the war behind them, partly due to an external threat (Soviet Union). In Asia, people still struggle with bad feelings, especially after Japan’s various crusades in the region.
8: A couple of objections
Objections – 1: measurement error?
GDP-K (purchasing power-adjusted GDP) is difficult to measure, both as a result of methodological problems and data access. In particular, it is the case that not so much price data has been collected far back in time, and measurement over long periods of time for many countries is thus more uncertain. As a check on this uncertainty, Figure 4 shows the shares in world GDP for Western Europe and Asia, with three different measurement methods
- One is GDP-K(M) with Maddison’s data, as in Figure 1.
- The other is GDP-K(W) with the World Bank’s latest calculations.
- The third is GDP-N, ie GDP compared on the basis of ordinary exchange rates.
The land coverage in the data sets varies slightly, but the discrepancies between the three are largely due to the type of data used.
For Western Europe, the three methods provide different levels, but a fairly similar trend over time. For Asia, growth is far stronger with the purchasing power-adjusted figures, especially for the period before 1995. The pace of change thus depends on the type of data set we use, and there is some uncertainty about the details, especially if we go far back in time. The main trends are nevertheless clear, and the figures for trade (Figure 2) also support that there was a rapid redistribution of both the world economy and trade.
Objections – 2: Wholesale trade can give a wrong picture
Growth in Asia has been largely driven by industrial production , and Asia’s entry into the world’s industrial goods markets has truly been impressive. Figures for world trade in industrial goods may, however, give a skewed picture, for several reasons:
- It is no longer a question of trade between national economies, but international production networks. For an item we import from China, much of the value can be produced in countries other than China.
- Part of the industrial expansion in Asia is driven by multinational companies from the West, through investments in China. These can take some of the profits with them, among other things by the trade passing through intermediaries where profits can be taken out.
- Commodity production and trade are only part of the world economy, and service production accounts for an ever-increasing share of GDP in rich countries. In trade in services, North America and Western Europe are still significant net exporters.
Since products that we import can be manufactured in many different countries, ordinary trade figures can give a wrong picture of the economic power relations.
A recent study of the iPod showed that only two percent of what we pay in the store is payment for processing in China. A quarter of the price goes to Apple. A recent study (NUPI, Melchior et al. 2012) shows that China shipped goods worth NOK 20 billion to Norway in 2010, but when they arrived the value had grown to NOK 40 billion. Some of this is profits that are taken out on the road, for example to trading in multinational companies.
All in all, there is no doubt about Asia’s industrial progress, but the West still retains some of its power, especially through technology and marketing, multinational corporations and service production . However, the Asian countries are working to become stronger in these fields as well, and the number of Chinese companies at the top of the world is increasing rapidly.
In the long run, the Asian countries’ ability to design, technology and marketing will improve. The average income in Asia (GDP-K) in 2010 was $ 6290 per capita; far behind Western Europe (31,110) and North America (34,381). The world average was around $ 10,000. If Asia increases to this level, the region will have the same share of the world economy as it has of the world population (2010: 55 percent). There is no reason to believe that growth in Asia will stop, even though China’s growth is expected to slow somewhat. The special thing was that Western Europe had such a high share fifty years ago, not that Asia has grown.
According to smartercomputing.org, economic development in Asia has been faster than political integration in the region. The same is true globally: While China and India like to bask among the powerful in the G-20, they are not ready to take on a leadership role as the US and EU have had in the past. This is also impossible because the world economy has become ” multipolar “, with several great powers. WTO negotiations have stalled, and it is uncertain how effective the G-20 can be. The world thus becomes a patchwork of global, regional and bilateral (bilateral) agreements, with an element of disorder rather than a new global order.
The 1980s and 1990s were marked by a distinction between the “lucky ones” in Asia and the unlucky ones in other regions of developing countries. The group of developing countries was thus divided into a couple of dozen successful developing countries, with the majority in Asia, and a long tail of poor countries with low growth, dominated by Africa. This also left its mark on the world’s political development, with a large group of “clients” and a focus on assistance to these, in addition to special treatment in trade agreements. Developments over the past decade have accelerated in Africa, and the group of low-income countries has shrunk significantly. If the positive development for the commodity regions continues, it may in the long run have significant effects in global policy.
One consequence of this development is that more and more of the economic interaction in the world takes place outside the West . We have already discussed the increased trade within Asia, and conclude with Figure 5, which summarizes all trade that takes place without Western Europe and North America being involved.
From 1990 to 2010, the share of trade outside the West increased from 19 to 38 per cent. This suggests that the shift in the world’s economic center of gravity is hardly an overestimated measurement error , but a real and dramatic change. With this new trade also comes new trade agreements and cooperation patterns, such as when China and India become more active in Africa, or Asia and Russia build new transport routes.