Reference no: EM131039121

CASE:The Comeback Accelerates

In the world of globalization, one often struggles to separate the rhetoric from reality. Some view it in the extreme, as in the transformation of everything. Others see it as just the latest stage in the evolution of the market. Some see it as the final phase before forces of deglobalization usher in the inevitable return to local enterprise. Despite wide-ranging opinions, the ongoing integration of national economies into the global market resets the business environment.

Discussions have taken a far more dramatic tone the past few years. Some commentators see the flattening of the world whereby advances in institutions, communications, and technology fundamentally change the economics of globalization. They speak of "distributed tools of innovation and connectivity empowering individuals from anywhere to compete, connect, and collaborate." Powered by hardware and software innovations, companies operate anywhere, anytime.

Others emphasize the entry of billions of people into the global marketplace. They reason that the world is in the "middle of a two-part revolution. Three billion new people-billion and a half Chinese, billion Indians, half a billion people from former Soviet bloc-have suddenly come into the global economy all at one time. Within these three billion people is a population as big as the United States, bigger than anybody in Europe or Japan, who are every bit as skilled and can do anything that could be done in the U.S. or Japan or any of the developed countries for ten cents on the dollar." Billions of low-wage, skilled workers radically resets how we interpret capital and labor in the production of goods and services.

Finally, the consequences of the global economic meltdown raised the specter of slowing markets triggering deglobalization. Rising trade barriers, risk-adverse companies, and nationalistic consumers slow the cross-national movement of information, people, products, capital, and jobs. Governments constrainthe animal spirits of capitalism, regulating what had become hazardously free markets. Economic freedom, as we saw with political freedom in Chapter 3, is under siege from surging state intervention.

What's Next?

Provocative in their own right, these interpretations suggest that, in the first decade of the twenty-first century, globalization reinforced long-running developments and initiated powerful trends. Combined, they challenge one's lifestyle, job, company, country, and future. The possibility that globalization has reached an inflection point-namely a time where old strategic patterns give way to the new-signals the need for managers to rethink economic principles and practices.

Understanding where we are heading calls for highlightingwhere we have come from. Initially, attention turns to how the world economy evolved from 1950 through 2000. During this time, the diffusion of democracy and free market principles powered growing trade among the richer, developed nations. It also spilled over to many poorer, developing countries. Institutions like the IMF, WTO, and World Bank stabilized the playing field. Companies from the United States, Western Europe, and Japan-the so-called Triad-ruled international businessand globalized the world in their image.

The precedents from this eraincreasingly fall short in helping managers interpret today's puzzles. Indeed, focusing on the tried-and-true indicators of the past distort interpretingtoday's global economy. Unquestionably, measures of the performance and potential in developed countries matter. However, they no longer matter decisively. Unfolding trends direct attention toward an epochal shift in the center of gravity of the global economy.

The Emergence

By 2050, four of the six largest economies in the world-Japan, China, India, and Russia-will be in greater Asia. Their growth will create a second tier of robust economies among their Asian neighbors, such as Singapore, South Korea, Indonesia, Taiwan, Kyrgyzstan, Vietnam, Thailand, and Australia. Countries in other parts of the world, like Brazil in South America, South Africa in Africa, and Israel and Saudi Arabia in the Middle East, will develop in-step with their Asian counterparts. (See Map 4.1). All, although each at a different pace, are inexorably moving from the periphery to the center of the global economy.

Extrapolating from 2012 out to 2050 is, unquestionably, more speculation than estimation. Still, these countries are implementing powerful pro-growth policies. Hard data confirm their success so far. In 1980, the combined output of emerging economies accounted for 36 percent of global GDP. They crossed a milestone in 2009, accounting for more than half of total world GDP. Similarly, emerging economies' share of world exports is nearly 50 percent (up from 20 percent in 1970). Their share of the world's foreign-exchange reserves is 70 percent (up from net deficits in the mid-1990s). China alone holds more than 28 percent of total reserves in the world. Institutionally, the G-7 expandedinto the G-20, thereby giving new members,like China, India, Brazil, Mexico, and South Korea, greater say in the premier globalpolicy forum.Thesenew stakeholders advocate different views of trade and investment regulation. Collectively, the accelerating rise of emerging economiessignaledthat the wealthy countries of the twentieth century would not dominate the global economy in the twenty-first century.

The economics in emerging markets suggests the revolution has only begun. Ambition to improve infrastructure, increase productivity, create jobs, and alleviate poverty has put into motion what will likely be the biggest economic stimulus in history.The last transformation of similar magnitude-the Industrial Revolution-involved far fewer people in far fewer nations but still produced a century-and-a-half economic expansion that altered lives everywhere. Today's revolution spans the globe and includes far more people in far more countries.The transfer of the leadership baton from wealthy countries to emerging markets, for better and for worse,resets our interpretation of economic environments.

PRECEDENTS AND PREDICTIONS

Making sense of the situation moves some to review a broader span of history. Oneneed only track the past millennium, they say, to put the current economic drama into perspective. Before the steam engine and the power loom drove the transfer of economic might from Asia to the West, today's emerging economies dominated world output. From 1000 to the mid-1880s, they produced, on average, 70 to 80 percent of world output (see Figure 4.1). Over this span, China and India were the world's two biggest economies; China alone generated one-third of the world's gross domestic product in 1820. In 1850, China produced the highest percent of all the goods consumed in the world. Britain, on the basis of the Industrial Revolution, soon claimed this title before ceding the top spot to the United States around the beginning of the 20th Century. By 1950, emerging economies' share of global output had fallen to 40 percent; China's share had fallen to 5 percent. They lost their lead (temporarily trends now suggest) as internal political failure, aggravated by colonial exploitation and unfair trade agreements, spurred isolationism and xenophobia. Consequently, the Industrial Revolution benefited the West while bypassing them.

Today, their ambition is straightforward: Restoretheir historic stature as the engine of the global economy. Since 2001, annual growth in emerging markets has averaged 6.4 percent; in contrast, the rich economies have averaged 1.6 percent. While they expand, the global financial crisisslows and shrinks many developed economies. Over the next decade, emerging economies will grow at an average of 6.8 percent a year. In addition, nearly 70 percent of the world growth over the next few years willcome from emerging markets, with 40 percent coming from China and India and another 15 percent from Brazil, Indonesia, Russia, and South Korea. In contrast, most developed economies will be fortunate just to grow. If these trends persist, in 20 years or so, today's emerging economies will complete their comeback, again accounting for more than 70 percent of global output. Symbolizing this process, China reclaimed the top spot it last held in 1850--it produced 19.8 percent of all the goods consumed in the world in 2009; the United States, leader for the previous 110 years, produced 19.4 percent and fell to second.

The diminishing role of today's rich economies, coupled with the accelerating scope of emerging economies, changes investment, trade, consumption, wealth, poverty, fiscal, and monetary patterns. For some, these shifts pose threats. For others, they create opportunities. Chart 4.1 gives an indication of who sees which. Noted one observer, "No visitor to the emerging world can fail to be struck by its prevailing optimism, particularly if his starting point is the recession-racked West... [emerging markets] see opportunities in every difficulty rather than difficulties in every opportunity." Put differently, strategic inflection points do not necessarily lead to disaster, as cell-phones to land lines or the Internet to print-centric newspapers. Change creates prospects for players, whether newcomers or incumbents, who are adept at operating in the new economy, such as those who applied computer chips to cell phones or publishers that migrated to the Web.

Source: Adapted from Pew Global Attitudes Project: Country's Economic Situation, 2011.

 

Still, megatrends such as "the Comeback" are rare events. And, unquestionably, trend often go awry. Still at this point the odds are that policymakers, executives, workers, and investors will wrestle with the consequences of the Comeback. Against this backdrop, this chapter profiles the frameworks that interpret the brave, new world. Economic change, particularly the sort we have seen during the global financial crisis,seems unpredictable. Nevertheless, as this chapter shows, there is rhyme and reason that helps managers interpret the development, evaluate the performance, and assess the potential of economic environments.

QUESTIONS:

1. Transformations such as the Comeback happen quite rarely. Their infrequency, however, only amplifies their revolutionary impact on our lives. Identify from the case how your life has changed, or will likely change, given the Comeback of the emerging economies. For a point of comparison think about what you've learned through your studies about how the transition from the Agrarian to the industrial revolution changed the way people lived their lives?

2. Identify from the case the three most important factors that you believe drive the Comeback of emerging economies. Explain why you think they would have the greatest impact on the development, performance, and potential of the economic environment in a developed country such as Germany, Japan, or United States?