Home .International Trade How trade is changing the world
How trade is changing the world
Monday, 19 July 2010 05:09

International trade by developing countries is fundamentally changing the shape of the world economy.  Have the developed OECD countries created a monster for themselves?

 

Let’s go back to scratch.  In the 1950s and 1960s, the global pattern of trade was a bit like the following.  The developed OECD countries were mainly exporters of manufactured goods, both to themselves and to developing countries.  The developing world exported primary commodities, like energy, minerals and agricultural products, principally to OECD markets.  You could say that developing countries depended on OECD markets.  They were not really drivers of trade.

 

Then things started to change.  The Asian tigers – Hong Kong, Korea, Singapore and Taiwan – emerged as exporters of manufactured goods, and ultimately became developed countries.  But they still depended on OECD markets.

 

Then around 1990, the world economic and political scene saw some major mutations.  The Cold War came to an end with the fall of the Berlin Wall, and then the dissolution of the former USSR.  Latin America began to liberalize its markets, and stabilize its economies, and democracy spread throughout the region.  Nelson Mandela was freed from jail paving the way for the abolition of apartheid.  In 1991, a reform oriented government was voted into power in India.  In 1992, China’s reform process was confirmed during Deng Xiaoping’s Southern Tour, turning the page on the Tiannaman Square tragedy. 

 

A common element in all these mutations was opening up to international trade and investment.  Many other policies were pursued, but trade and investment liberalization was perhaps the most important. 

 

Against the background of these historic changes, the 1990s decade saw fairly disappointing economic growth, especially for Africa and Latin America.  May be the fruits of reform took time to ripen.  May be the reforms were not well implemented.  We will never know for sure.  Over a decade, financial crises struck in Mexico, East Asia, Russia, Turkey and Argentina. 

 

But, major changes did take place in the 2000s decade, prior to the global economic crisis, as documented by the OECD in its recent book on “shifting wealth”.  And in contrast to the past, developing countries have survived the current global financial crisis better than the developed OECD countries.  While GDP for the OECD countries fell by 3.3% in 2009, it rose by 1.2% in the developing world.  And in 2010, OECD GDP might rise by 2.7%, about half the 5.2% the World Bank forecasts for developing countries.

 

Let’s take a look at some the major developments:

 

. In 2000 non-OECD countries accounted for 40% of the world economy.  By the year, their share had risen to 49%, and it is slated to rise to 57% by 2030, even though GDP per capita in most developing countries will remain below OECD levels.

 

. This rising share of the world economy has been driven by trade and investment, especially trade between developing countries.  Between 1990 and 2008, total world trade expanded fourfold, while trade between developing countries multiplied more than ten times.  Developing countries no longer depend just on the developed OECD countries – 37% of global trade now takes place between developing countries.  Foreign direct investment between developing countries has also increased.  Trade and investment among developing countries may have reached a critical self-sustaining mass. 

 

. By 2009, China had become the leading trade partner of Brazil, India and South Africa, and the second leading trading partner of the whole African continent.  China now imports more oil from Saudi Arabia than does the US.  The Indian multinational Tata is now the second most active investor in sub-Saharan Africa.  Developing countries hold over $4 trillion in foreign currency reserves, more than 1 1/2 times the amount held by developed OECD countries.  A rising amount of research and development is now being carried out in the developing world.

 

. This has resulted in dramatic reductions in poverty.  The number of poor people declined by 120 million in the 1990s, and fell by nearly 300 million in the first half of the 2000s.  Poverty in China fell from 60% of the population in 1990 to 16% in 2005.

 

. These rapidly converging economies were blessed with a new identity, as Goldman Sachs coined the term BRICs to cover Brazil, Russia, India and China.

 

All is not rosy however in the developing world.  In fact, rather than splitting the world into a developed and developing part, we can observe the emergence of a “four speed” world:

. “affluent” – these countries are the OECD countries which are home to about 20% of the world’s population;

. “converging” – in these countries, GDP per capita has been growing more than twice the OECD growth rate;

. “struggling” – these are middle income countries, but with growth rates less than the converging countries.

. “poor” – these are poor countries with GDP stagnating or falling – they are basically Paul Collier’s “Bottom Billion” and most could be classified as failed states. 

 

In other words, some developing countries are beginning to catch up to the living standards of the affluent countries.  Others are struggling to break through a middle-income “glass ceiling”.  And some are mired in extreme poverty. 

 

The important thing is that in the 2000s, the number of converging countries rose from 12 to 65 – these countries at least doubled the average per capita growth of the OECD countries, and the number of poor countries more than halved from 55 to 25.  Struggling countries also fell from 66 to 38.  

 

What have been some of the major impacts of all these changes?

 

. 1.5 billion workers joined the open market-oriented economy in the 1990s.  This alone may have depressed worldwide low-skill wages by 15%.  Many workers in developed OECD countries would have suffered from this. 

. the price of many consumer products also fell, providing immense benefits to consumers, especially low-income consumers.  Labour intensive manufacturing in some OECD countries, and also in struggling developing countries, have suffered from competition from the dynamic converging countries.

. global market increased by 2.5 million consumers.  This includes a rapidly growing middle class in emerging economies which provide many market opportunities for exporters from OECD countries.

. these factors boosted demand and prices for many commodities, particularly fossil fuels and industrial minerals and metals.  By the onset of the global financial crisis, oil prices had quadrupled from their 1995 level, and metal prices almost doubled.  This transferred wealth from commodity importers like most OECD countries toward Africa, Latin America and the Middle East, as well as a few OECD countries like Australia and Norway.

. many converging countries moved being net debtors to net creditors as they built up large foreign exchange reserves.  The counterpart of this was excessive borrowing by countries like the US.

. when the US-induced global financial crisis struck, it became clear that the world steering committee, the G8 no longer had credibility.  Western countries were obliged to recognize the importance of the developing world.  The G20, which had been created for finance ministers and central bank governors after the 1997 Asian Financial Crisis, replaced the G8 as the global steering committee.  While the G8 still meets on the side of the G20 meeting, the BRICs also have their own summit meetings.

 

What are the implications for developed countries like the US, Japan, Canada or Australia?

 

. The only way to cope with the new competition from low-skill workers is by upgrading their economies – innovation, education, flexibility and adaptability.

. Commodity importing nations need to generate more revenues to pay for these imports.

. At the same time, the emerging middle class presents a great new market – as do the markets for products solving global issues like climate change technologies, health technologies for ageing populations, etc.

. OECD countries are now having to share power in global decision making with major emerging countries, and this requires new capacities to forge consensus and less high handedness.

 

What are some of the implications for developing countries?

 

. For converging economies to continue their progress will require further market opening, improvement in the capacity to absorb knowledge and technology, and improving governance to manage the increasing complexity of a more advanced economy and society.

. For commodity exporters, it is essential to develop effective revenue management policies to avoid the natural resource course.

. For poor countries, good leadership, building the capacities and developing human capabilities to create wealth are key.  This is an immense agenda discussed in other articles on this website

 

What are the implications for us all?

 

. Continuing with trade liberalization, and resisting murky protectionism.

. Cooperating nationally, regionally and globally for provision of public goods, especially environmental protection and social cohesion (by reducing income disparities).

 

Some political implications

 

As an economic organization, the OECD is not able to dig into the political implications of this shifting wealth. 

 

The OECD countries are delighted that market economy principles and to a lesser extent democracy are now spreading through the developing world.  But, a whole new set of poltical relationships are developing especially through "south-south" trade.  China is now friends with a host of unsavoury African regimes like the Sudan, as well as Iran and Burma, which supply it with oil and other resources.  India is now cosying up to Burma, while Brazil is also conducting international relations which are not in the interests of Western.  In addition, China's rising trade is also challenging Western friendships.  Saudi Arabia now exports more oil to China than to the US.    

 

We must always be aware of the law of unintended consequences!

 

 

References:

OECD, Perspectives on Global Development 2010.  Shifting Wealth.

http://www.oecd.org/document/8/0,3343,en_2649_33959_45462088_1_1_1_1,00.html


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