The coming global economic battle: Who will lead next?

There is an on-going global economic shift in power from West to East. Peter Temin, currently a Professor Emeritus of Economics, MIT and former head of the Economics Department, in his excellent paper "Economic History and Economic Development" has claimed that 21st century may belong to the West or nobody, but one thing that is surprising is that the current year will be a landmark year for the world economy, one when the dominance of the USA appears to be over as China becomes the world's largest economy. On the other hand, after 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale.
However, India's recent economic data are promising and in 2013, India has come in at 5th position in the ranking with the forecast of real GDP growth at 5.7 per cent whereas Russia's current-account balance has been mostly in surplus in recent years. In a word, now the global economy is going through a race to set in position among super powers.
The question is: who will win the global economic battle and lead the next? China has surpassed the US in terms of GDP based on purchasing power parity (PPP), becoming the largest in the world by this measure, International Monetary Fund estimates show. In 2014, China reached $ 17.6 trillion or 16.48% of the world's purchasing-power-adjusted GDP, while the US made slightly less, 16.28% or $ 17.4 trillion, several international media reported quoting IMF data. PPP is recognised as the best way to compare the size of economies rather than using volatile exchange rates, which rarely reflect the true cost of goods and services.
Thus a trillion US dollars is worth a lot more in China than in the US. While China might be ready to surpass the USA in PPP terms, the USA still far outpaces China when it comes to Ease of Doing Business rankings and labour productivity. Research and development (R&D), however, is one area where China is rapidly gaining ground. Despite this, there is real contest between the two countries in terms of quality of the business environment. All the above statements point finger to transitional economic success to lead the next century.
Transition Economy:
A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy. Today economists suggest that the success of winning in global economic battle largely depends on applying the market economy theory. Transition economies undergo a set of structural transformations intended to develop market-based institutions. In comparison to that China fares better and is ahead of USA or Europe. The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. On the other hand after 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public's enthusiastic support, so would ordinary Japanese. Let us pay attention to current Russia. The rapid depreciation of the ruble, despite a dramatic - and seemingly desperate - late-night interest-rate hike by the Central Bank of Russia (CBR) last month, has raised the spectre of Russia's economic meltdown in 1998. Indeed, the West has sought to animate that spectre in its ongoing confrontation with Russian President Vladimir Putin. But, though Russia's economy is undoubtedly in trouble, a full-blown collapse is unlikely.
Oil and gas account for more than 60% of Russia's exports; other primary commodities make up much of the rest. Given this, the recent sharp decline in world oil prices obviously represents a major shock - large enough, when combined with the effect of increasingly strict Western sanctions - to provoke a sizeable recession. By contrast, in recent years, Russia has enjoyed a sizeable budget surplus, and public debt is below 20% of GDP. It is true that income from oil and gas, which represents the bulk of government revenues, has been halved when measured in dollars. But the Russian currency has fallen by about the same percentage, meaning that the government's income in rubles remains approximately unchanged.
Euro is weakening:
In the last couple of months the euro continued to depreciate versus sterling and dollar. The major reason for this is the difference between the fragile economic situation in the eurozone on the one hand and the solid recovery in the UK and the US on the other. As the economies in the UK and the US are recovering, the markets expect that their central banks will raise interest rates during the course of 2015. In contrast, for the ECB no rate hike is expected anytime soon. Rather the expectation is that eurozone's central bank will step up its quantitative easing in order to stimulate lending to private non-financial companies sometime in 2015. The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam. That model depends on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing. In contrast to Europe, the United States is emerging as the developed world's strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.
BRICS Bank:
Now the BRICS Bank! Consider what a Brazilian diplomat said on condition of anonymity after the formulation of the Bank. "We pulled it off 10 minutes before the end of the game. The Chinese got the headquarters. The Indians got the first presidency. The South Africans got a regional headquarters. We were happy to facilitate all this. And the Russians are happy that finally there is a bank that could challenge the IMF and World Bank." So the genuine interest of the group has been enthusiastically clear -- to diminish the power politics of the USA and the EU. We should note here that BRICS account for almost half the world's population (40 per cent to be precise) and about one-fifth of global economic output (20 per cent of world GDP) and 17 per cent of international trade. This clearly signifies the vision of BRICS and it must try to devalue the currency supremacy of Dollar in international trade in the days to come. More interestingly, India reigns supreme in South Asia, China lords over in the Asia-Pacific region, Russia plays influential role in the EU, Brazil leads the very potential and emerging Latin American economic zone and South Africa heads the African economy.
Emerging economies:
Now we need to look at the emerging economies that would be a factor in the world political economics in the coming years. Euromonitor International has made a list on it. It is already a known factor that investors have been pouring money into emerging markets -- to the tune of $ 50 billion last year for mutual funds that invest in developing countries, according to EPFR Global. So, the emerging economies will be the guiding issues of international politics. On the purchasing power basis, China is overtaking the US right about now and becoming the world's biggest economy, according to the forecast. The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019. According to IMF estimates, in 2015 the gap between China and the US will increase to almost a trillion dollars: Chinese GDP PPP will amount to $ 19.23 trillion against $ 18.286 trillion in the US. However in terms of a real GDP the United States remains the undisputed world leader with $ 16.8 trillion output, significantly outpacing China with $ 10.4 trillion. China is likely to maintain a sustained growth rate in the range of 7-8 per cent a year for the foreseeable future, higher than most world economies. China's market demand will continue to expand, because of the country's relatively low GDP per capita, combined with rapid urbanisation and industrialisation over the next decade. By 2015, China is projected to become the second largest consumer market in the world, with enough purchasing power to buy 14 per cent of the world's products. According to McKinsey, by 2020 private consumption would rise to 43 per cent of GDP, while investment would drop to 38 per cent. China will further narrow the gap in terms of total economic output with the United States in the next decade. According to the most optimistic estimates, China's GDP will catch up with that of the US by 2020, calculated according to the renminbi-dollar exchange rate.
India's economic data are promising. Annual average GDP growth is forecast to range from 6.4% to 7.7% until 2025. This compares favorably with last year's 4.7% rate, and is close to the 7.7% average recorded in the decade up to 2012. Moreover, it contrasts sharply with the expectations of secular stagnation in the developed world. This acceleration would place India among the world's fastest-growing large economies and increase the number of Indian consumers who can afford discretionary items from 27 million in 2012 to 89 million in 2025.
Nigeria is, surprisingly, expected to be the second-fastest growing major emerging market this year. The economy is thought to expand by 6.6 per cent in real terms in 2014. One of Nigeria's chief advantages is its large current account surplus, which stood at $ 11.8 billion or 4.0 per cent of GDP in 2013. In the Philippines real GDP growth is expected to reach 6.5 per cent in 2014 - and this rate is expected to be maintained in the medium term. As Bangladesh has recently found its way back to political stability and is displaying a renewed focus on growth, its GDP growth is expected to recover, rising to 6.2 per cent in FY2014/15. This is assuming continued macroeconomic stability and a boost for domestic consumption from remittances and for aggregate demand from public infrastructure investments. The outlook for Sri Lanka remains positive with an expected 7.8 per cent GDP growth in 2014, subdued inflationary pressures, an improving external position and further fiscal consolidation and debt reduction. There is no denying the fact that at current circumstance, China has already become an important part of the global economy. Now, the Chinese economy is highly dependent on international markets and resources, as well as technology and human capital. China's economic success is the story of globalisation.
Over the next ten years, China's transition will also be a story of globalisation. Whether successful or not, it will have a significant impact worldwide. Experts have described the toppling of America after nearly 150 years by China - even on the PPP measure - as a 'symbolic' moment for the global economy. It is also a clear indication that the American century is losing ground and the Asian century to begin with a new hope in global economic race. To conclude, the assumption is the rise of China and India is set to change the existing World Order by altering the global balance of power surpassing USA, UK and even Russia. Possibly, these two countries are driving strategic interests and policies in Asia and rest of the world. As the dominance of these two countries begin to grow and the influence of the traditional Western superpowers begin to wane, the geopolitical implications of this change is increasingly being felt by the countries of the world. In fact, the world economy is now on a transitional phase. Though the future is full of uncertainty, let's keep watching who will lead next.

Shahabuddin Rajon is Assistant Secretary, BKMEA. E-mail: rajon.itcitaly@gmail.com