Is the global economy making the world flatter? Smaller? Are we entering a “great convergence?” In the midst of a “global leveling?”
Depends on whom you talk to.
Maybe the 19th century Danish philosopher Søren Aabye Kierkegaard had it right: “Life can only be understood backwards, but it must be lived forwards.”
Living forward, everyone agrees the economic and political order for the past 20 years is changing. Asia is rising. The axis of trade, money and geopolitical clout is shifting east and to some degree south. The capitals of Europe don’t matter quite like they used to. Even the United States—unchallenged atop the global heap since the end of the Cold War—is mulling a future where it is one among several interconnected powers, not the world’s indispensable nation.
Some powerful trends are reshaping the world’s economy, and while they’ve been building for some time, they’re picking up speed. Just look at the events of the last five years. While the so-called Great Recession that started in 2008 socked the U.S., the U.K. and Germany, countries like China, India and Vietnam kept chugging along. Since the recession eased, Europe has sunk into a debt crisis and the U.S. seems perennially stuck in first gear, unable to create many jobs and just starting to face its own mountain of debt on the horizon. Yet emerging economies continue to power ahead.
Of the 60 fastest-growing metro area economies last year, 45 were in Asia, Latin America or the Middle East, according to a recent study by the Brookings Institute. Only one, Houston, was in the U.S. Brookings ranked 300 metro area economies, and European cities dominated the bottom of the list.
Some of this movement is cyclical, the normal ebbs and flows of the global economy. Indeed, some big emerging markets show signs of cooling off. But much of the economic shifting is rooted in trends that will outlast any particular business cycle. The biggest trend, however, boils down to simple numbers.
There are 7 billion people in the world today. Six billion live outside the “developed” economies of North America, Europe and Japan. Over the next 40 years, the planet is expected to add about 2.6 billion more, according to the Population Reference Bureau. Nearly all of them will live in developing countries.
And unlike their grandparents, most will live in cities, where they’ll fuel factories and launch companies and generally be more economically productive than any generation before them. Their productivity will help to gradually close the gap that has long split the global economy into haves and have-nots.
Today, most people on planet Earth live in poverty. But a recent study by the National Intelligence Council predicts that the emerging global economic shift will lift a majority of the world’s people out of poverty for the first time in history. They will be better educated, be more independent and have greater access to global communications, the council finds. “The middle classes will be the most important social and economic sector in the vast majority of countries around the world,” reports the study.
For decades most of the world’s wealth resided in the most productive and developed economies—mainly in the United States, Europe and Japan. As recently as 2000, those three places accounted for 60% of global economic activity. In 2011, for the first time on record, that share dipped below 50%. In 2030, those three regions—today’s centers of global business—will amount to one third of the global economy, predicts the Organization for Economic Co-Operation and Development. By 2060? Just 28%.
In their place will rise ever-bigger emerging powers, chief among them China and India.
China could overtake the United States as the world’s largest economy by the end of this decade, and the OECD predicts it’ll outweigh the United States, Europe and Japan put together by 2060. By then, India’s economy will be larger than America’s, and other large emerging economies will be higher on the world’s economic food chain than they are today.
We’re essentially headed toward a two-speed global economy, with the developed world in one gear and developing countries in another, says Anand Rao, a partner at the Insurance Advisory Service at PricewaterhouseCoopers.
“It’s quite evident that the Western world is basically in a steady or even recessionary state,” he says. “Not much growth. Mature markets. But when you look at Asia and Latin America, they’re booming. You see disproportionate GDP increase and the opportunity for more.”