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Global wealth shifts toward emerging economies

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    Global wealth shifts toward emerging economies
As the international trade shares of the emerging and developed world converge, global wealth and asset holdings will shift toward emerging economies

As a group, emerging economies are likely to experience significant increases in their international trade flows by 2025, in terms of both imports and exports. The value of Indonesia’s exports, for example, is likely to double between 2010 and 2025, while the value of its imports is expected to be more than one-and-a-half times higher by 2025. Global trade is forecast to expand as a share of global output over the same time period, from 49.9 percent of output to 53.6 percent.

As advanced and emerging shares of global trade converge..." and "...emerging economies will hold ever-greater shares of global assets and wealth."

These current account paths mean that major emerging economies are likely to collectively take on a large and rising net asset international position (albeit at a diminishing rate) in their holdings of investments in developed economies (which, in turn, are expected to build equally large net liability positions). Global wealth and asset holdings will thus shift further toward emerging economies with surpluses, such as China and major oil exporters in the Middle East. This adjustment is already reflected in the current financial landscape: International reserves held by emerging economies topped $7.4 trillion in 2010 (approximately three times the $2.1 trillion in reserves held by advanced economies), and the share of cross-border mergers and acquisitions (M&A) by firms based in emerging economies in 2010 was 29 percent ($470 billion) of the global total.

The road ahead for emerging economies—while cautiously positive—will nevertheless entail downside risks of both a short- and a long-term nature. If economies with historically low TFP contributions are unable to raise their productivity levels through institutional reform and technological innovation, the existing two-track global economy may fracture even further into a slowly divergent growth path between advanced economies, low-productivity developing economies, and high-productivity developing economies. Similarly, if outward-oriented emerging economies with weak internal demands are not successful in increasing their consumption share, capital in these economies may eventually be channeled toward increasingly unproductive, low-yielding investments. The run-up in commodity prices since 2003 may also become persistent, which could potentially derail growth in developing countries that are especially commodity intensive. On the upside, if emerging economies successfully navigate their rising per capita incomes, provide necessary infrastructural improvements, and facilitate corporate sector reform, the baseline scenario may underestimate emerging economies’ future growth potential. Finally, unexpected economic and geopolitical developments may introduce fundamental uncertainty of a nature that is impossible to develop scenarios for.

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