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Development, Trade and Foreign Affairs

East Asia: Shifting Economic Gravity and Changing Political Landscape

centre_gravity

(Source: BBVA research, IMF, and Qauh D., 2011)

Phnom Penh, Nov 29, 2016
By KHOV Ea Hai

The Western economic supremacy in the world is practically a recent phenomenon as the Global Economy’s center of gravity has located in mid-Atlantic Ocean since the 1980s. However, the center of gravity has been shifting its base toward the East as there are number of emerging middle powers keep snowballing the trade-flow volumes, growing population, and integrating distance through connectivity. As projected by LSE, the center of gravity will be significantly drifted to locate in “between India and China”[1] due to the rise of China, India and the rest of East Asian countries. “These countries now increasingly influence the pattern and scope of international trade, creating new supply and demand pulls and flexing their influence in international organizations”.[2] The shifting global economy’s center of gravity has definitely changed the pattern of international trade in which it involved much larger South-South flows as the result of intensifying multiple stages of production networking globally across the different individual countries since they can efficiently expense less. At the meantime, the fragmentation of supply chains continue to further do since the developing countries, particularly Asian countries, have greatly invested in R&D (their shares of global spending keep increasing annually) and the rapid advances in communication and technology. In 2013, “Southeast Asia has become the world’s largest region for new research investments- a trend expected to continue through the decade.”[3]

Today, the developing countries account for 37% of global trade, but they will account for an estimated 57% of global GDP by 2030. Starting from 33% in 2010, the total global stock of capital will be reached up to 50% in the developing countries by the year of 2030, as projected by the World Bank.[4] At the same time, by the year of 2030, both China and India will potentially account for at least 35% of world population and 25% of global GDP. On the top of that, China, which is the largest commodity trader, will continue to consolidate its dominance in global trade and emerge as the major source for outward FDI. Importantly, “Owning to the demand created by the new middle classes, their rises have been linked to a future shift in the economic center of gravity to Asia, which accounts today for 34% of global activity but by 2030 could account for over 50% of global output” (Kharas 2010). The effect of this shift of global economic mass towards Asia is predicted to become self-reinforcing, with India and China benefiting from their increased proximity to the world’s economic center of gravity.

“Two-thirds of the global middle class will be Asia-Pacific residents by 2030, up from just under one-third in 2009.”[5] Asian countries, which have rapid growing, young population combined with strong economic growth, will represent 66% of the global middle class population and 59% of middle class consumption by 2030, up from 28% and 23%, respectively in 2009.[6] OECD predicted that China and India may experience a “seven-fold increase in income per capita by the year 2060.”[7] Economically, the rise of developing countries, particularly Asian countries, has brought the millions of people out of extreme poverty in which it leads to the new growing global middle class. The growing middle class translates as greater demands and becomes the potential consumers in the market for global trading. As the consequences, it indeed becomes a major driver for a wide range of global development from economic to social and political evolution. The expansion of the new global middle class in developing countries has diminished the gap of inequality between developed and developing countries. At the same time, it raises the voices of the emerging economies to insert greater influence in the global economy by drawing the global attention.

Challenges to Shifting Economic Gravity

The gravity model theoretically suggests that relative economic size attracts countries to trade with each other while greater distances weaken the attractiveness. It is therefore much more related to the economic of scale and network effects. Since the distance also does matter, the connectivity will significantly play a role in this sense due to the economic proximity or economic agglomeration are the benefits that counties obtains by locating near each other leading to the networks in the global economy. The different actors physically closed to one another will transfer the tacit knowledge. Since the economic interconnectedness provides a tremendous lift for gravity model, it becomes the policy choice for emerging economic to appreciate the interconnectivity, both soft and hard, for even growing faster than traditional routes. The drifting set a new opportunities and challenges for national policy-makers to create more business-friendly investment environments in rapid-growth markets, or they will fall behind. While at the same time, there are at least two major challenges frightening or possibly reversing the development of emerging economies, particularly the Asian countries. (1) The most foreseeable significant threat is the “concept of the middle-income trap.” Without further reforms, the rise of wage and the decline of their competitiveness, the emerging economies will subsequently stagnate and ultimately fail to transform itself to achieve the status of advanced economies depending upon the high-skill, research and innovation. (2) The unforeseeable changing political landscapes in the East Asia, East Asian countries, including ASEAN countries, still confront with various traditional and non-traditional threats. Unlike the European countries which have solved their traditional issues after the WWII, the East Asian countries remain struggling on their claims over the territorial disputes such as the South China Sea, the East China Sea and the Korean  Peninsula. All of these three disputes have already drawn the participations from major powers, such as China, Japan, India, Russia and US, to middle powers, namely both Koreas, and claimant Southeast Asian states, which possible could turn the regional and international peace and security into chaos.

 

 

[1] Danny Quah, “The Global Economy’s Shifting Centre of Gravity,” Economic Department, London School of Economics and Political Science and LSE Global Governance, Global Policy Volume 2, Jan 2011

[2] Pascal Lamy, Director-General of WTO.

[3] Global R&D Funding Forecast, Battelle and R&D, Dec 2013

[4] “Megatrends 2015: Making Sense of a World in Motion,” Ernst and Young, 2015

[5] “Hitting the Sweet Spot: The Growth of the Middle Class in Emerging Markets,” EY and Skolkovo Institute for Emerging Market Studies, 2013

[6] Mario Pezzini, “An Emerging Middle Class,” OECD Observer, 2012

[7] “The Rise of Global Middle Class,” RAND, 2015

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This entry was posted on November 29, 2016 by in Development Policy, International Relations and tagged , , .

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KHOV EA HAI

KHOV EA HAI

Researcher and Trade Economist

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