ASIA SHIFT Inquirer P2.
AS the world economy emerges from the financial crisis, a startling new phase of globalisation is being revealed.
For a generation, freeing up trade and capital flows around the world has been driven by the rich nations, led by the US. Having been hit hardest by the crisis, however, these developed nations are now struggling to reconstruct their economic growth models.
They are burdened by unprecedented peacetime debts, being forced to wind back unaffordable social entitlement systems and are underprepared for the costs of their ageing populations.
The US is printing money to generate a lower dollar and to revive job growth; Europe is gripped by a sovereign debt crisis and battling to save the euro; Britain has been forced into its most savage austerity since World War II; and Japan yesterday suffered a sovereign credit downgrade.
As the rich world struggles, globalisation now is being powered by the big emerging market economies, led by China and India and extending to Indonesia, Brazil and others. Emerging market globalisation is even bypassing the rich world.
This is the irresistible theme among the couple of thousand political, financial and business elites who gather at this time of the year for the World Economic Forum in the Swiss ski resort of Davos. Indonesian president Susilo Bambang Yudhoyono told these high priests of globalisation that Asia was undergoing a "rapid and strong economic, social, cultural and strategic resurgence, the size of which is certain to redefine global affairs". He called it "the big shift" that would shape what he called "21st century globalism".
This new globalisation is already making nations like Australia much richer & more influential on the global stage. The rise of an emerging market urban middle class centred in Asia is pumping up the prices of commodities we export, from iron ore, coal and copper to beef and cereals. But this new world order also is likely to be more volatile, for instance as rising food prices spark social unrest in poorer nations and prompt some commodity producers to curb their food exports.
As well, prolonged high unemployment and budget austerity could produce a damaging political backlash in rich countries. That already is showing up in the currency war between Washington and Beijing that is making countries such as Brazil and South Africa less competitive.
The US Federal Reserve Board's "quantitative easing" is encouraging a flood of capital into the higher-growth emerging markets and pushing up their inflation and interest rates. In turn, developing countries are flirting more with controls on capital inflows to restrain their currency appreciation.
So far, however, the rapid rebound of China and other big emerging markets has helped pull the world economy out of recession quicker than many hoped.
Famed New York-based economic bear Nouriel Roubini called it a LUV recovery. The euro-zone economies, tipped by the IMF to grow a tepid 1.5 per cent this year, were in an L-shaped path out of the crisis. The US is in a U-shaped recovery, tipped to expand a sub-par 3 per cent this year. America's big corporates are in good shape, having pared back their costs and built up massive cash reserves. Yet the emerging markets -- led by 9 per cent-plus China and 8 per cent India -- are the V.
While many are relieved that a global depression has been averted, the crisis has exposed the weaknesses of the rich country growth model. At Davos last year, even the IMF was warning that the global recovery was still too fragile for budget stimulus measures to be quickly withdrawn.
But that was just as the Greek sovereign debt crisis was erupting before spreading to Portugal and Ireland. And that has forced Europe into budget austerity to cap the rise of its huge government debt burden lest financial markets impose a more brutal solution.
And, in his annual State of the Union address this week, Barack Obama said the rules have changed from when Americans could get a good secure job by merely turning up at the nearby factory. "Today, just about any company can set up shop, hire workers and sell their products wherever there's an internet connection," the US president said.
"Meanwhile, nations like China and India realised that, with some changes of their own, they could compete in this world and so they started educating their children earlier and longer, with greater emphasis on math and science. They're investing in research and technologies. Recently, China became home to the world's largest private solar research facility and the world's fastest computer."
In the new globalisation, the US president is saying that China and India are educating their workers better than many Americans. At Davos, this represented a broader shift. Some suggested that a multi-national corporation could just as easily get access to a few hundred skilled engineers in India than in a rich economy. And these new production opportunities are lining up with the new sources of consumer demand as the emerging markets shift their growth model away from exporting to the US and Europe.
"I think what's really happening is that the slowdown of the Western world and the continued expansion of the emerging market world is really shifting the balance of power in terms of where the consumer lies," Azim Premji, chairman of India's global IT services company Wipro said.
Obama called it the US's "Sputnik moment", harking back five decades ago to when the Soviet Union beat the US to putting a man in space. He outlined a growth and competitiveness strategy to lift America's lagging school performance, invest more in economic infrastructure such as high-speed rail, cut company tax, review business regulation and freeze parts of federal budget spending to contain the public debt explosion.
"President Obama articulated clearly the need for the US to restructure its economy," Washington-based international policy economist Fred Bergsten said in Davos. "He didn't go far in suggesting how that would happen."
Bergsten said Obama identified the need for the US to rely less on debt-financed consumer spending and government deficit spending in favour of increased saving, higher exports and stronger private investment; the so-called rebalancing of global growth called for the successive G20 leaders summits.
A substantial fall in the US dollar, at least against the Chinese yuan and some other Asian currencies, was the "transmission mechanism" to deliver this more balanced growth, Bergsten said. But the rest of the world was justified in waiting to see whether the US would do its part, such as by attacking a budget deficit that the IMF tips will hit 11 per cent of gross domestic product this year. "The US is getting perilously close to that threshold point for a financial crisis," Bergsten warned.
While Obama was talking in Washington, Yudhoyono was flying into Davos from New Delhi, where he attended India's national republic day celebrations and signed more than $15 billion of trade and investment deals. In Davos, Indonesian officials described the two economies as complementary. Indonesia needs infrastructure investment in railways, airports and energy generation. India needs the raw materials resource-rich Indonesia sells.
It's perhaps the most striking example of the new emerging market globalisation: the world's biggest Muslim nation becoming more economically tied to the world's second most populist and Hindu-dominated nation. But it's repeated elsewhere. The IMF this week forecast that sub-Saharan Africa would grow more than 5 per cent this year and nearly 6 per cent next year, thanks to growing trade and investment ties with China, again related to resource demand.
In Davos, Australian trade officials were surprised to discover that China is Brazil's biggest trade partner: it's Australia's main iron ore rival. "Everyone is looking to the Asia Pacific," Trade Minister Craig Emerson said in Davos. "How do we get part of this 8, 9, 10 per cent a year growth."
Remember that this is happening less than 15 years after the East Asian financial crisis that thrust Indonesia into the harsh grip of the IMF and only a decade after China joined the World Trade Organisation, an anniversary yesterday marked by a special session at Davos. Of course, the US decline could still be turned around, while emerging markets such as India's bubble might burst if the capital inflows reverse.
But Yudhoyono suggested that Asia's renaissance meant that countries such as Indonesia and regional groupings such as the Association of South East Asian Nations would play a more strategic role in resolving global problems. With the relative decline of the US, "no single power can shape the world order alone", he said.
The Indonesian leader called for the major economies to finally nail a deal this year on the WTO's Doha round of global trade liberalisation. Yet French president and this year's G20 chairman, Nicolas Sarkozy, neglected to mention the Doha round in his remarks at Davos on Thursday, instead calling for measures to stabilise commodity markets. Former head of the WTO forerunner Peter Sutherland berated Sarkozy for the omission.
In Davos for a trade ministers' gathering on the Doha round, Emerson was not impressed. "Anyone who is concerned about high prices for agricultural products should be in favour of trade liberalisation," he said. "If there is liberalisation of trading rules then those countries that are good at producing agricultural products will be able to produce more of them. If you produce more of them, that takes pressure off prices."
The good news for Australia is that the emerging market globalisation appears driven by the projected expansion in world population from less than 7 billion to 9 billion over the next generation, with most of this in Asia.
And, as emerging market populations become more urbanised, they are driving demand, and hence prices, for the mining, energy and agricultural products Australia controls & exports. Rio Tinto chief executive Tom Albanese suggested the mass spread of mobile phones was encouraging 5 billion or so people to aspire for rich world living standards, including living in city apartments with airconditioning.
"They want the stuff we produce," the mining boss said, saying it would be very difficult for any "black swan", or left field event, to disrupt this booming emerging market demand for raw materials.
At the same time, however, new resource deposits were becoming harder to find and taking longer to develop in order to satisfy stakeholders. "Nobody wants a big mine in their backyard," Albanese said.
The message is that it will take time -- perhaps 10 to 15 years -- for global mining supply to catch up to the surge in emerging market demand. That would mean an extended period of high export prices for Australia.
The more troubling Davos take, however, came from New York-based political science and risk consultant Ian Bremmer who dismissed the G20 exercise as a panicked response to the financial crisis.
Now the worst had passed, the G20 was being exposed as cumbersome and ineffective.
Instead of the G20, Bremmer has made a splash by dubbing the new globalisation as "G zero". "What we have is everyone for themselves," he said yesterday. The old G7 (basically, the US, Europe and Japan) was too weak to provide the global leadership needed to resolve pressing global issues such as nuclear proliferation, climate change, trade and economic policy co-ordination.
Yet emerging market nations were either not capable of providing global leadership or held views incompatible with those of the developed economies, such as through their promotion of "state capitalism".
"Globalisation for the last 40 years has been the West reaching out and bringing in the emerging markets, their labour and profits," Bremmer said, "and a lot of people did very well. But that globalisation is over because the West can't consume the way it used to, the west's fiscal constraints are greater and the emerging markets want to define globalisation their way."