THERE has been much speculation that the financial crisis will be a catalyst for change in the structure of the global economy. Many see it hastening the rise of the new tigers in the east and the decline of the old lags of the west.
The reasons are clear. The new economies are dynamic, resource rich, increasingly wealthy, and uncluttered by centuries of industrial practice and social rigidity. The old ones are tired, weighed down by regulation, their productivity is poor, their budgets are burdened by large debts. The new economies have ambition and zing, the old ones are just struggling to keep up.
This view may fit many people’s view of the tide of history, but is it really true?
Last week, the World Economic Forum published its latest global competitiveness report, which lists countries by how well they are doing on the productivity front. What is striking is not the evidence of big structural shifts, because there is none. The list is remarkably similar to those of recent years.
Nine of the top 10 places are still occupied by major western economies: the US, Germany, Japan, Canada, etc. The only tiger economy there is Singapore in third place. But Singapore has been a high flyer for years . You have to go a long way down the list before you reach the new challengers: China in 29th place, India at 49th and Brazil down at 56th. (SA was unchanged in 45th place).
True, the challengers have risen up the list, but only slightly: China and India by one place, Brazil by eight.
These rankings tend to confirm what others have been showing. The global financial centres index published earlier this year, for example, actually showed a reversal of earlier trends. The “new” centres such as Shanghai, Bombay, Dubai were languishing, while the traditional ones such as London and New York had strengthened their lead.
Of course, these rankings are based on judgments by individuals using various measures of success so they can easily be dismissed as perceptions rather than concrete evidence. But they do force us to ask why the cataclysmic events we have been through are not producing more evidence of change.
One is that, in the short term at least, developing economies have been as badly hit by the crisis as the developed. The Bric countries (Brazil, Russia, India and China) have all suffered their setbacks. Once flourishing centres such as Singapore and Dubai have seen severe downturns, even if they may spring back faster than older economies. Their once-vaunted sovereign wealth funds have shrunk. This has shaken the confidence of those who thought these economies were “decoupled” from the rest of the world.
Another is that it is relatively easy for a country to accelerate with massive inflows of foreign investment and technology, but harder to sustain the pace once those flows begin to weaken. China, for example, is a long way from providing a business environment that matches those of Switzerland and the US, the world’s two most competitive economies in the rankings. For all the trillions of dollars in its coffers and its low production costs, China’s prospects remain clouded by bureaucracy, corruption and political uncertainty.
A third reason is that the developing economies are still weak on innovation. They remain the quarries and factories of the world, dependent on others for their ideas, techniques and markets. Financially, they also live in a dollar world which puts them, and the rest of us, at the mercy of the US. Though there has been talk of creating alternative currencies, don’t hold your breath.
This is not to rule out structural change, but to suggest that it may take longer than people think. When people look at the US economy laden with debt, its banking system in tatters, they tend to overlook its economic dynamism and its political openness, both of which are crucial to future growth. And when they look at the tigers, they focus on their huge reserves, their hectic pace of growth and strong human and natural resources, but pay less attention to their internal political strains and lack of business sophistication.
If we are now heading into a recovery, it is due to the return of growth and confidence in the industrial economies because that is still where investors and businesses take their cue. They have a track record, and people understand how they work. The emerging economies may look rich and strong, but they do not yet have the same status.
Lascelles is a senior fellow of the Centre for the Study of Financial Innovation in London and a former banking editor of the Financial Times.