Sweeping changes are afoot in the global economy. As the second decade of the 21st century unfolds and the world exits from the 2008–09 financial crisis, the growing clout of emerging markets is paving the way for a world economy with an increasingly multipolar character. The distribution of global growth will become more diff use, with no single country dominating the global economic scene.
The seeds of this change were planted some time ago. Over the past two decades, the world has witnessed emerging economies rise to become a powerful force in international production, trade, and finance. Developing countries’ share of international trade flows has risen steadily, from 30 percent in 1995 to an estimated 45 percent in 2010. Much of this rise has been due to an expansion of trade not between developed countries and developing countries, but among developing countries. Similarly, more than one-third of foreign direct investment in developing countries currently originates in other developing countries. Emerging economies have also increased their financial holdings and wealth. Emerging and developing countries now hold two-thirds of all official foreign exchange reserves (a reversal in the pattern of the previous decade, when advanced economies held two-thirds of all reserves), and sovereign wealth funds and other pools of capital in developing countries have become key sources of international investment. At the same time, the risk of investing in emerging economies has declined dramatically. Borrowers such as Brazil, Chile, and Turkey now pay lower interest rates on their sovereign debts than do several European countries.
As investors and multinational companies increase their exposure to fast-growing emerging economies, international demand for emerging-economy currencies will grow, making way for a global monetary system with more than one dominant currency. The growing strength of emerging economies also aff ects the policy environment, necessitating more inclusive global economic policy making in the future.
This broad evolution under way in the global economy is not without precedent. Throughout the course of history, paradigms of economic power have been drawn and redrawn according to the rise and fall of states with the greatest capability to drive global growth and provide stimulus to other countries through cross-border commercial and financial engagements. In the first half of the second millennium, China and India were the world’s predominant growth poles. The Industrial Revolution brought Western European economies to the forefront. In the post–World War II era, the United States was the predominant force in the global economy, with Germany and Japan also playing leading roles.
In more recent years, the global economy has begun yet another major transition, one in which economic influence has clearly become more dispersed than at any time since the late 1960s. Just as important, developing countries have never been at the forefront of multipolarity in economic affairs. During the forecast period of Global Development Horizons (GDH) 2011—from 2011 to 2025—the rise of emerging economies will inevitably have major implications for the global economic and geopolitical hierarchy, just as similar transformations have had in the past.
Increased diffusion of global growth and economic power raises the imperative of collective management as the most viable mechanism for addressing the challenges of a multipolar world economy. The key differences that the management of a multipolar global economy will present global economic order relate to the distribution of the costs and responsibilities of system maintenance and the mechanisms for sharing the special privileges and benefits associated with being a global growth pole. In the postwar era, the global economic order was built on a complementary set of tacit economic and security arrangements between the United States and its core partners, with developing countries playing a peripheral role in formulating their macroeconomic policies and establishing economic links with an eye toward benefiting from the growth dynamism in developed countries. In exchange for the United States assuming the responsibilities of system maintenance, serving as the open market of last resort, and issuing the most widely used international reserve currency, its key partners, Western European countries and Japan, acquiesced to the special privileges enjoyed by the United States— seigniorage gains, domestic macroeconomic policy autonomy, and balance of payments flexibility.
Broadly, this arrangement still holds, though hints of its erosion became evident some time ago. For example, the end of the postwar gold exchange standard in 1971 heralded a new era of floating currencies (formalized by the Jamaica Agreement in 1976), a trend that has not been limited to developed countries. Particularly since the East Asian financial crisis of 1997–98, developing countries have increasingly floated their currencies. Changes in currency use have also occurred. As Europe has followed a trajectory of ever-increasing economic integration, the euro has come to represent a growing proportion of international transactions and foreign exchange reserve holdings. At the same time, developing economies’ increased trade flows and the gradual opening of their economies to foreign capital have benefited developing economies handsomely, boosting their growth potential and tying their economic and financial stakes to the continuation of a liberal global order. In the unfolding global economic environment, in which a number of dynamic emerging economies are evolving to take their place at the helm of the global economy, the management of multipolarity demands a reappraisal of three pillars of the conventional approach to global economic governance—the link between economic power concentration and stability, the North-South axis of capital flows, and the centrality of the U.S. dollar in the global monetary system. Such a reappraisal offers much in advancing the debate on the future course of international development policy and discourse.
In anticipation of the shape of the future global economy, this first edition of Global Development Horizons aims to map out the emerging policy agenda and challenges that an increasingly multipolar world economy poses for developing countries.