Friday, June 03, 2011

Economy: Six Set to Fuel South-South Cooperation

World Bank chief economist Justin Yifu Lin | Credit: World Bank

By Devinder Kumar Courtesy IDN-InDepth NewsReport

NEW DELHI (IDN) - India, along with five other emerging economies -- Brazil, China, Indonesia, South Korea and Russia -- is poised to account for more than half of all global growth by 2025, and the Six will help drive growth in lower income countries through cross-border commercial and financial transactions, according to a new World Bank report.

Titled 'Global Development Horizons 2011-- Multipolarity: The New Global Economy', the report predicts that the international monetary system will no longer be dominated by a single currency. The report says the most likely global currency scenario in 2025 will be a multi-currency, centered around the dollar, the euro, and the renminbi.

The report projects that as a group, emerging economies will grow on average by 4.7 per cent a year between 2011 and 2025. Advanced economies, on the other hand, are forecast to grow by 2.3 per cent over the same period, yet will remain prominent in the global economy, with the euro area, Japan, the United Kingdom, and the United States all playing a core role in fuelling global growth.

China and India are likely to be the main flag bearers among emerging market growth poles in the years ahead, according to the report. The combined real output of six major emerging economies will match that of the euro area by 2025. "Today's emerging economies will, in real terms, account for 45 per cent of global output, compared with about 37 per cent in 2011 and 30 per cent in 2004," says the report released in Washington on May 17, 2011.

These countries will account for about as great a volume of international trade and investment flows as the developed world, and the drivers of global growth will be not only developed giants, but also major developing countries such as China and India.

The report notes that innovation and innovative capacity are already rising in emerging economies. "The setting up of major research facilities in China by Microsoft, the invention of the Nano microcar by Indian firm Tata, and the continued string of aeronautical breakthroughs in Russia suggest the emerging-economy giants' strong potential for fostering growth through technological advancement," say the Bank.

"The fast rise of emerging economies has driven a shift whereby the centers of economic growth are distributed across developed and developing economies – it's a truly multipolar world," said Justin Yifu Lin, the World Bank's chief economist and senior vice president for development economics. "Emerging market multinationals are becoming a force in reshaping global industry, with rapidly expanding South-South investment and FDI (foreign direct investment) inflows. International financial institutions need to adapt fast to keep up," he added.

Before joining the World Bank in June 2008, Lin served for 15 years as Professor and Founding Director of the China Centre for Economic Research (CCER) at Peking University, and remains on leave from Peking University during his World Bank tenure.

According to the report, emerging economies that used to rely on technological adaptation and external demand to grow will have to make structural changes to sustain their growth momentum through productivity gains and robust domestic demand.

Global Development Horizons maps out the challenges that a multipolar world economy poses for developing countries over the next twenty years. The authors use empirically-based indices to identify high-growth countries with strong human capital and technological innovation, and that also drive economic activity in other countries. Growth spillovers are likely via cross-border trade, finance, and migration, which will induce technological transfer, and increase demand for exports.

The report highlights the diversity of potential emerging economy growth poles, some of which have relied heavily on exports, such as China and Korea, and others that put more weight on domestic consumption, such as Brazil and Mexico.

With the emergence of a substantial middle class in developing countries and demographic transitions underway in several major East Asian economies, stronger consumption trends are likely to prevail, which in turn can serve as a source of sustained global growth.

"In many big emerging economies, the growing role of domestic demand is already apparent and outsourcing is already under way," said Hans Timmer, the World Bank's director of development prospects. "This is important for the least developed countries, which are often reliant on foreign investors and external demand for their growth."

The shift in economic and financial power toward the developing world has important implications on corporate financing, investment, and the nature of cross-border merger and acquisition (M&A) deals.

As more deals originate in emerging markets, South-South FDI is likely to rise, with most of it going into greenfield investments, while South-North FDI is more likely to target acquisitions. As they expand, more developing countries and their firms will be able to access international bond and equity markets at better terms to finance overseas investments.

The growing role and influence of emerging-market firms in global investment and finance can facilitate moving forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920s, the report says.

"Over the next decade or so, China's size and the rapid globalization of its corporations and banks will likely mean a more important role for the renminbi,” said Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank. "The most likely global currency scenario in 2025 will be a multi-currency one centered around the dollar, the euro, and the renminbi," he added.

To sustain growth and cope with more complex risks, economies that are home to emerging growth poles need to reform domestic their institutions, including in the economic, financial, and social sectors. China, Indonesia, India, and Russia all face institutional and governance challenges. Human capital and ensuring access to education is a concern in some potential growth poles, particularly Brazil, India, and Indonesia.

"The projected changes in the global economy are fundamental. Overall, these shifts will likely be positive for developing countries. However, a key question is whether existing multilateral norms and institutions are sufficiently strong to accommodate the passage toward multipolarity. The challenges of managing global integration among power centers makes strengthening policy coordination across economies critical to reducing the risks of economic instability," said Dailami.