The World Economic Forum meeting in Davos indulged in three main themes: banker bashing, how the international community was going to rebuild Haiti over the next decade (being sceptical, let us put that item on the Davos agenda in 2020 to see what has been achieved!), and the growing threat from the highest peacetime government budget deficits.
The deficits and rapidly burgeoning public debt result from government fiscal stimulus and financial intervention programmes and, more importantly, from lower revenues due to the ‘Great Recession’. Western bankers and financiers had every reason to feel contrite (with senior bankers talking about the ‘social responsibility’ of banks) and huddle together fearing a political backlash.
This backlash was well illustrated by President Obama’s initial proposals to downsize banks and reinstate an amended Glass-Steagall Act. The reasons for the backlash are clear: the IMF estimates that the financial losses from the crisis could amount to some $4.2 trillion. In addition to the loss of financial wealth, we should add housing foreclosures, the loss of output and rise of unemployment.
The financial and banking crisis plunged the world into the first decline (by about 0.8% in 2009) in world output in 30 years and the worst recession since the Great Depression of the 1930s, resulting in measured unemployment rates of about 10% in both the US and Europe. Despite a partial recovery of global stock markets in 2009, investor confidence has not been restored and risk aversion is high: economies and financial markets remain fragile.
While the Davos participants focused on current affairs, the strong Chinese presence should have reminded them that the world had changed. The WEF theme of ‘Rethink, Redesign, Rebuild’ might be inspiring, but it misses the essence of the global dislocation whose consequences we are experiencing. While the advanced countries are likely to experience an anaemic recovery in 2010 despite unprecedented central bank and government stimulus policies, the emerging market economies led by China, Brazil and India weathered the financial storm, grew strongly in 2009 and are well positioned to benefit from a global recovery.
Indeed, emerging market economies have contributed more than two thirds of global economic growth since 2002; and in 2009 the emerging markets contributed 90% of the world’s growth. The US – though still the largest economy - is no longer the world’s engine of growth. Between 2002 and 2007, China’s average contribution to world economic growth approached 66% of that of the US; China and India’s together, almost 85%; and East and Southeast Asia’s, more than 130%.
Thirty years ago the world’s economic centre of gravity was a point west of London, somewhere towards the middle of the Atlantic Ocean. But in the 30 years since then, that centre of gravity has drilled 2000km – about one third of the planet’s radius - deeper into the Earth’s crust, away from the US and now lies between Mumbai and Beijing. China is now the world’s second largest economy, surpassing Japan.
Increasingly the evidence is that emerging market economies, including the Middle East and the Gulf countries, if not completely decoupled from the advanced economies, are increasingly linked to Asia and to China. This trend will not be reversed. For the years and decades to come we will be dancing to a Chinese tune: this is a tectonic shift in economic and political power eastwards.
The Arab countries are challenged to re-orient their economic, trade investment and financial policies eastward: that is where our future lies. We need to build greater regional economic integration and move towards greater integration with Asia.
By Dr Nasser Al Saidi on Monday, 15 February 2010
Dr Nasser Al Saidi is chief economist at the Dubai International Financial Centre.
