Why is the economic power still with the west?

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

The West is rich; the East remains comparatively poor, in spite of all the great recent economic achievements”. Asia has gained significant importance in the wider world economy today. Enormous growth of two major Asian economies – China and India in the past decade coupled with the slowdown of a number of advanced economies in the west only hints towards economic power shifting from the west to east. However, it is a long road ahead before the global economic order faces such a radical change. This is simply because developed countries have accumulated immense wealth and socio-economic infrastructure over the centuries which continue to give them an advantage in capacity as well as influence over the east.

The downward spiral of the west started with the global financial crisis of 2008. This was followed by notable failures of the European Union. Crisis in independent debt management, fragility in financial sector and problems due to weaknesses in their institutional design were the main characteristics of the advanced economies of the west. The downturn of United States coupled with the crisis in the European Union only acted as catalysts in the decline of the west.

At the same time, the east emerged in a number of areas. This emergence is attributed mainly to the demographics, rapid urbanisation, growing middle class and potential for increasing productivity. 60 percent of the world lives in emerging markets of Asia, however, only 20 percent fall under the consumption bracket. When this consumption increases, these emerging markets are going to become mega markets of the world. Growing trade among developing countries is regarded as one of the major driving force of these markets in Asia. Another interesting aspect to note is that for the first time, Asian economies are investing across the globe. This is in stark contrast to the fact that Asia has been the hub for global investment for many decades now. It is encouraging and worthy to observe the change in this trend.

Government, financial institutions and households are robust, healthy and growing in the emerging economies of Asia. However, they seem to have weakened greatly in the West. Asia has experienced commendable and significant structural changes in the past few years which have contributed towards the rapid growth of this region. It has grown faster than any other region around the world. This phenomenal growth has been termed as a super-cycle which is characterized by rising trade, high rates of investment, rapid urbanisation and technological innovation.

Among the emerging economies of Asia, China and India are regarded as the front runners that are experiencing massive expansion. While China had been the center of global manufacturing, India has become the international hub for global services industry. 60 percent of the GDP of Asia comes from just these two economies. The economic resurgence of the two economies has also made way for the emergence of a number of other Asian economies such as Thailand, Indonesia, Pakistan and Vietnam.

However, on the flipside, this excessive growth and improved structural transformation has been very uneven. A number of economies still need to come a long way to reach the standards of the front runners. Several countries have moved out of agricultural sector to industrial and service sector. Despite this, agriculture continues to employ a large portion of the workforce in Asia. There has been a shift from agriculture to low productive sub service sector. The exports basket has also become more diversified and refined, but only in the advanced economies of Asia.

Asian economies need to engage in inclusive growth and oppose all forms of trade protectionism to fuel economic growth. They must come together collectively and work towards policies which will further boost economic activity within Asia. Increasing importance is given to emerging economies by global organizations in order to consider their requirements towards integrating the global economy.

The emerging economies of Asia must take this to their advantage and ensure maximum assistance is received from global institutions.

Innovation is one major area where the west still dominates and the east has to catch up. They must also focus on structural transformation and direct labor towards highly productive sectors. Agriculture needs to be developed specifically in the low income economies by making modern and sophisticated methods available and implementing policies to increase productivity of this sector. These are some of the key areas that will drive employment and thereby contribute towards increasing wages in the sector which will thereby lead to increase in investments.

Emerging Asia has immense competitive advantage in manufacturing and service sector. Hence, looking forward, Asia most definitely appears to be better placed than the rest of the Global Economy. They must, however, work towards ensuring continuous innovations and build deep intellectual and institutional capital to have an edge over the already established west.

The Director General of World Trade Organization (WTO), Pascal Lamy, in September 2012, said “The rise of emerging economies was set in motion by the changes in technology, transportation costs and regulatory environment”. This swing in economic power has profound geopolitical consequences that will hardly be reversed in the foreseeable future.

However, while new economic and political trends have emerged, the rules and institutions governing multilateral cooperation have not kept pace with these changes. The difficulty in finding a new balance between advanced and emerging economies in a muted context has certainly played an important role in holding back meaningful progress.”

Asia has weathered the Global Financial crisis better than any other region. It has not only shown resilience and prompt recovery, but has also contributed largely towards the global economic recovery. However, despite the fact that the rapid economic growth of the developing countries has led to a more balanced distribution of economic power, they do not have much say in the global political and economic affairs. Many emerging countries are still way behind the developed countries in overall capacity, international outreach, institutional building and economic and social growth.

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

Varsha Ramachadran is a Research Associate at the Takshashila Institution.

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