Tectonic plates of global economic power are shifting

This is a very powerful speech by Robert Zoellick, President World Bank. (HT: Justin Lin Blog)

He says the world is at a critical inflection point where developing countries are going to form a larger share of the world economy. However, the institutions as we have it today has not really adjusted to this change. There is a need to adjust to this new reality and give developing a larger share in world affairs.

He goes back to BWoods when the three hallmark instis were created but for different times:

The architects of Bretton Woods created a system designed for their world. Let’s take a moment to recall that world.  

In that world, even amidst the post-war devastation, developed economies’ share of global GDP was about 80 percent, with the United States alone accounting for over 40 percent. In that world, developed economies accounted for over two thirds of trade. In that world, most of today’s developing countries were still colonies. For almost seventy years now, the multilateral architecture of 1944 has persisted.  It has creaked and groaned – with currency and oil shocks in the 1970s, developing countries’ debt debacles in the 1980s, and expansions and crashes in the 1990s – but the system has remained broadly intact.

For all its weaknesses, critics, and patch-ups, the Bretton Woods system provided the enabling framework for the greatest era of growth and the largest, most successful, economic transformation over the shortest time in history. Some nations doubled their GDP per capita in a decade rather than the quarter century it had taken the now industrialized countries in the 19thCentury.  But the Bretton Woods system itself is not inviolate, cast in stone for all time.  

BWoods founders showed we need to change with time. Warning signals are on highlighting change:

The key insight the Founders of Bretton Woods left us was the need for wisdom to recognize when something qualitatively new is going on, and for the wit and will to face and accommodate what’s new – to act boldly, decisively, yet cooperatively. 

Today, history’s warning lights are flashing again: red, yellow, and yes, some green, too.  Will we face the challenges of 2011 with nostalgia, with a longing for times past?  Will we face them with denial, with our heads stuck in the sand?  Will we face them with blame, with acrimony obscuring the potential?

Will we face them with timidity?  

Or will we face the challenges squarely, constructively, creatively?  Will we reason from experience, but think afresh for our own times?  Will we recognize drastically changed circumstances and find a pathway to allow for all men – and women – from all countries to advance side by side?

He points to some startling figures from China:

In the 1990s, developing countries accounted for about a fifth of global growth.  Today, developing countries are the engine driving the global economy.  In the 1990s, developing countries accounted for a little more than 20 percent of global investment. Today they attract about 45 percent.

 Over the past ten years, developing countries have grown nearly four times faster than developed, and that trajectory is expected to continue.   Some forecasts estimate that by 2025, six major emerging economies – Brazil, China, India, Indonesia, the Republic of Korea, and the Russian Federation – will collectively account for more than half of all global growth. 

 Already we live in a world where, if China’s 32 provinces were countries – and the provinces are more populous than most states – they would be among the 33 fastest growing countries in the world over the last 30 years.    Today, China is consuming over half of the world’s cement; almost half of the world’s iron ore, steel, and pigs; a third of the world’s eggs.  Today, China is the world’s biggest consumer of minerals such as copper, aluminum, and nickel.  Today, net FDI inflows into China are around $180 billion, up from some $40 billion just ten years ago.  As China shifts from building a foundation of growth, some of this demand for materials and minerals will ease – but India will be next to gear up. 

Indeed the techtonic plates are  shifting. He says it is wrong to assume developed will decline. Just that developing to grow faster:

This is not the 1944 world.

But beware of assuming straight-line trends.  As China’s leaders know, the country’s successful growth model is unsustainable.  China is recognizing that it needs to face challenges of environmental degradation, inequality, resource use, demographics, productivity growth, and over-reliance on foreign markets.

If China reaches $16,000 of income per person by 2030 (up from today’s $4,000) –a reasonable possibility – the effect on the world economy would be equivalent to adding 15 South Koreas.  It is hard to see how that result would be sustainable within a model of export-and investment-led growth. 

I am also skeptical of predictions of advanced economies’ inevitable decline. With credible and definitely possible action – not just short-term fixes – on debt and deficits to restore confidence, and with a focus on structural and tax reforms to spur private sector growth, boost productivity, and create jobs, advanced economies can turn around and power ahead.  Predictions of inevitable stagnation and decline — from the Central European pessimism of Oswald Spengler to the stagnation hypothesis of the distinguished Harvard Keynesian Alvin Hansen — have time and again proved to be wrong. 

He nicely says the developed cannot preach economic virtues to the world when they are huge violators themselves:

 “First World” and  “Third World,” “North” and “South,” “developed” and “underdeveloped,” “advanced” and  “emerging,” “donor” and “recipient,” “provider” and “supplicant,” “rich” and “poor,” “them” and “us.” The language of development has been the language of old hierarchy.  Old World. Old Order. And not without a whiff of hypocrisy. 

 When countries that produce almost 50 percent of their electricity from coal tell poorer countries with no energy alternatives that they cannot use coal – what are they really saying?  “Do what I say, not what I do.”  When countries with large fiscal deficits preach fiscal discipline to poor countries – what are they really saying?  “Do what I say, not what I do.” 

 When countries pay homage to free trade but hold back developing countries with barriers, what are they really saying?  “Do what I say, not what I do.”  When countries advocate debt sustainability for the poorest, yet have debt levels at historic heights, what are they really saying?  “Do what I say, not what I do.”

A “do what I say, not what I do” world economy will fracture, to the detriment of all.   The old ways can and must change.

This means a new world order where countries are now apeing successes of developing not developed:

Around the world, it’s no longer European, Japanese, or American models that developing countries are seeking to emulate.

 The Mexican and Brazilian conditional cash transfer systems are being looked to for their innovation in keeping children in school, improving infant and maternal mortality, and overcoming poverty without breaking budgets. 

 Turkey’s reform program of the past ten years is providing inspiration for reforms in North Africa and the Middle East.

 Singapore’s combination of open economy, services cluster, anti-corruption, and relentless adaptation to changing conditions is drawing admirers from as far afield as Africa, the Gulf States, and Russia.

 India’s model for information technology services is being copied by Ghana, Kenya, Madagascar, Mozambique, Nigeria, Senegal, Rwanda, and Tanzania. 

 Colombia’s mass transit system has been recognized as an international best practice and replicated in cities across the region, from Mexico City to Santiago and Lima. 

What would the new world order be:

The New Normal will be about Smart Economic Power: the successful will be alert to learn from the ideas and experiences of all countries, regardless of the old labels.

 The New Normal will be about voice – of women in their communities, of citizens in their countries, of states in the international system.  As we have seen in the Middle East and North Africa, it will be about social accountability, government transparency, civil society.  It will be about citizens who are changing our world even as we race to catch up. We must support them.

The world needs to move beyond aid for development. Now capital flows are more than aid and developing are giving their shars of aid.

He proposes a new solution for this new world – fifty % solution. This means giving women their equal rights and power:

Superb stuff. Full of punch and power.

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