New Economic World Order

As Western Capitalist Cruises risk sinking into the depths of the ocean, Eastern Neo- Capitalist Vessels safely sail in pursuit of a eudemonic prosperity. Over the last 18 months, the world has witnessed the Eurozone drown in a debt crisis, worsened by slower economic growth, and America, the world’s largest economy, overwhelmed by unmanageable debt levels complied with diverging political solutions. In stark contrast, China and India’s economic growth has rapidly increased, underlining their major share of demand in the global market. Other Asian economies are gathering momentum, Latin America has been rejuvenated from its ‘lost half-decade’ and Africa has finally convinced others of its potential to become an economic force, albeit in the long run, providing heavy foreign investment. The dynamics of a new economic order is taking shape, which involves a titanic tussle between the old western masters and the emerging world’s apprentices, amidst this financial storm.

Before the 2007-2008 financial crisis, the West have been smug and righteous in their ‘lecturing’ to the East on the importance of political stability, sustainable development and strong macro-economic management strategy to reach the Epicurean riches the West were enjoying. From the governance of multilateral organisations to the innovation of financial service products, the global infrastructure was seen to favour western interests. There were numerous attempts by emerging economies to change this, but, unsurprisingly, those attempts were rejected.

How times have changed. The unprecedented leverage, massive debt creation, and credit freezes punished the West’s arrogance for not compromising with the emerging economies. Financial excesses become the rule rather than the exception, facilitated by financial innovation, the ignorance of lending standards and lack of prudential regulation. Suddenly, “rich” western economies were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on western economies. This fueled large global imbalances and thus, triggered a financial crisis that has rattled this open economic system.

The root of the financial crisis lied in America. Their overconfidence in the housing bubble and ignorance to notice the flaws in the securitisation of sub-prime mortgaging nearly caused the country to lose $5 trillion dollars had the Federal Reserve not taken action. Four years later, after numerous bailouts, stimulus packages and calls for social optimism, pessimism and lower standards of living transcend all American minds. Americans are unhappy, and becoming more so, about their country’s prospects and politicians’ efforts to improve them. This malaise of policy decision making partly reflects the sluggishness of the recovery. However, in recent months, unemployment has been falling, share prices are close to a three-year high, house prices are still in the low and the price of petrol has soared to levels not seen since the summer of 2008. Nevertheless, a recent poll, done by the Economist, suggests that Americans have long term worries: stagnating living standards and a dark future in an economy slow to create jobs, saddled with big government deficits and faced with substantial economic and political threat from China. Tellingly, a majority now regard China, not America, as the world’s leading economy.

Western Europe, mainly the Eurozone, also suffered deeply in the recent financial crisis. Eurozone seems likely to disintegrate unless it can resolve the current debt crisis and prevent the implosion of the single currency. Fears of insolvencies amongst PIGS, especially Greece, have created political and social tensions. Somehow the Eurozone must allow Italy and Spain to receive bailouts financed by the European Central Bank with a structural and fiscal compromise.  By doing such, confidence should return to European markets. Higher confidence means financial markets are willing to lend to Eurozone governments and banks who, in turn, start lending more which increases business confidence to invest and obtain profit maximisation and consumer confidence to spend and reach optimal utility. As a result, Europe would then suffer only a light recession, but recover, and slowly but painfully grows its way out of its debt problems. However, Western Europe faces its toughest challenge yet; to revitalise a somewhat sluggish growth, whilst operating under tight austerity cuts, high unemployment and multiplying debt concerns.

China is the biggest winner following the Financial Crash of 2008. China’s GDP Annual Growth rate, on average, is 10%. Despite the year-on-year rise of 8.9 percent was the slowest since mid-2009, China’s fourth-quarter growth figures was still slightly stronger than economists had predicted. China’s centrally directed industrial policy in which the government places huge amounts of capital and labour in certain enterprises has been a huge success. The backbone of China’s economic growth is mainly built cheap labour. However, as China’s wealth and GDP per capita (currently $4,400 compared to the U.S.’s $47,000) continues to increase, labour costs will soon cease to be cheap compared to the labour forces in India, Turkey and across Southeast Asia because the workforce will demand higher wages to keep up with inflationary pressure. If China can carefully manage their economy for future generations, China’s can maximise its own potential for more prosperity and influence on the global economy. However, China’s dependency on State Capitalism works on the grounds that there is political stability. However, if that were to stop, China‘s economy would be in disarray and have serious consequences for the rest of the world.

India’s economic rise is due to the existence of highly influential shadow sectors, private provided infrastructure and family dominant firms providing a strong economic scaffolding to India’s economy. Recently, economic activity rose far more than expected in December, alleviating fears that the economy was unraveling. Yet gross domestic product growth has slowed dramatically and is likely to worsen in the current quarter. Furthermore, India’s deep rooted political problems including corruption scandals and bribes has increased the social and external costs for India, increasing the gap for social optimum equilibrium.

Other Asian economies are also profiting. Singapore, another emerging market, saw their non-oil exports surged 16.4 percent in December 2010, more than four times the consensus forecast in a Reuter’s poll. But economists still think this city-state is slipping into at least a brief recession. However, emerging economies in South Asia face a common theme of corruption and bribery within political parties. They must ensure a reduction in poverty, wage inequality, favouritism to certain enterprises and ensure stable growth is maintained. Or else they face social unrest, inefficient enterprises and an overheating economy.

Latin America has vastly improved compared to 1990s in which it suffered incredulous political elections, self destroying foreign exchange system and restless social uproar. Even during this current global economic slowdown, the improved macroeconomic management has fortified Latin America’s economic resilience. However, that is not enough to keep them on the upward curve. Indeed, Latin America has had sound  practices in monetary policy – for example, inflation targeting with flexible exchange rates – with clear benefits. However, in order for Latin America to avoid another ‘lost-half’ decade, its fiscal policy needs to loosen up, such as relaxing industry taxation, and decrease deforestation to provide sustainable growth. This should not be at the expense of prudent fiscal management which helped some Latin American economies weather the crisis.

What about Africa? Africa is 15% of the world’s population but accounts for only 1% of global manufacturing and 1% of global inward investment. However, with scarcity of global resources, Africa will be the next growth centre of the global economy in the coming decades. China has already demonstrated their quick thinking and initiative by heavily investing in countries such as Zambia. If Africa is to have any chance of challenging the economic superpowers and enrich its current deprived living standards, Africa must commit to higher investment in infrastructure, enhance labour’s skill set and attract low-cost manufacturing plants which are looking to re-locate from Asia. As Jakaya Kikwete, president of Tanzania said Africa is ‘starting from very low levels of development’. However, rapid progress can be made: sticking to economic reform programmes, investment in education, transforming agriculture from a position where people ‘live from hand to mouth’, developing infrastructure, boosting manufacturing and integrating both regionally and internationally. Yet it will be a long time that Africa moves away from poverty to prosperity, givien the current state of corruption, crime and political uncertainty in the continent.

This is the year when the whole world ceases, according to Mayans. It is also the year in which politics and economics come under scrutiny when they stand up to these difficult challenges. Western cruises and Eastern vessels are traveling in opposite directions. This could be the year which decides the shift in global power; a new economic order is on the horizon.

Contributed by Wafiq Islam