Originally from our sister publication, Advisor.ca.
The developed world’s current woes—anaemic economic recovery, deleveraging of private sectors and shrinking balance sheets of the financial sector—will likely continue for another decade. At the same time, the dynamic emerging world will create a desirable background story.
Martin Wolf, associate editor and chief economics commentator for the Financial Times, is not known to mince words when it comes to his vision of the world economy. He was true to form Thursday during a lunch-hour speech made to what he facetiously referred to as “a bunch of serious masochists,” at the Economic Club of Canada, in Toronto.
The world, he said, is in the middle of two gigantic economic processes.
“First, the shift: the rise of the emerging world, above all, of east and south Asia,” he said. “The second: the unwinding of a generation-long leverage process [in the developed world].”
The processes playing out in the world economy and the difficulties witnessed by the Western nations are not transitory, he said. “We are being driven by [what is happening in the world economy], rather than making our own choices, [and that is] one of the big points of fixing global finance.”
The shift
Wolf reminded the audience that in the last 10 years the growth rate of the emerging world has been 6% a year while that of the developed world, is has been, in aggregate, 1.5% a year.
“We’ve moved into a completely different dynamic, in terms of the relative growth of the components of the world economy and their relative size,” he said. “This has continued during the Great Recession to a quite extraordinary degree.”
Quoting an IMF report, he said the Chinese economy will expand by 60% between 2007 and 2012. Asian, emerging and developing economies together, which make up half of humanity, will expand by slightly over 50%, while the developed economies, in aggregate, will not grow at all. This is a numerical way of saying that the global recovery will continue to remain polarized.
“The speed of change that is now occurring [in the emerging world], and the relative size of economies, has no historical precedent,” said Wolf. “This, [by comparison], makes the rise of the U.S. in the late 19th and early 20th centuries a really slow motion event.”
The biggest effect, however, was created by what Wolf calls the savings shock; namely, the emergence of a rapidly growing set of economies that emerged as savings-surplus economies
“This is quite an extraordinary development and people still don’t understand fully how significant and surprising it is,” he said.
In the late 19th and early 20th centuries, the world saw a vast outpouring of capital from the developed world to the emerging world of better opportunities. This time, however, the reverse happened.
“Throughout the last 10 years, and it’s still true today, the emerging world became a net capital exporter; on a very large scale,” said Wolf. “The principal reason for this was [certain] policy choices designed to protect these economies, particularly China, from what they saw as the incredible dangers of allowing the free flow of capital into them.”
A lesson emerging economies have learnt from waves of massive financial crises, particularly the one in 1997, which Wolf says was the turning point in world financial history.
In the late ‘90s, the world entered a phase of very fast growth and very low interest rates. In Wolf’s view, it was “a very strange world” of “extraordinary excesses in the asset market,” of which housing is the most important example. A phenomenon to which Wolf imputed the rise of housing prices in many countries, particularly in those countries with elastic credit systems.
“This is directly related to the emergence of the emerging world, the global imbalances that followed the failure of finance in the ‘90s, the extraordinary low interest rates that we had,” he said. “That is the line between the great shift and the extraordinary shock we have subsequently been experiencing.”