Fri, 11/13/2020 – 17:00
Who really won the Cold War? Maybe China.
In 1972, Cold War logic pushed President Richard Nixon into an unlikely alliance with Mao Zedong—bringing China back into the mainstream of the world economy. In 1991, the collapse of the Soviet Union encouraged “end of history” hubris that blinded the West to the consequences of China’s rise.
Fast forward to 2020 and China has emerged as a major global power, its single-party rule and state-dominated economy the cause of alarm in foreign capitals—and pride in Beijing. By 2035, Bloomberg Economics forecasts, China will have overtaken the U.S. to become the world’s biggest economy and perhaps also its most powerful political actor.
China’s rise is just one part of a larger shift that’s already under way and looks set to accelerate in the decades ahead.
Bloomberg Economics has used a growth accounting framework—adding up the contributions of labor, capital and productivity—to forecast potential GDP through 2050 for 39 countries, from the U.S. to Ghana. We’ve used that data to map some of the key geographic and political shifts in store for the world economy.
The results suggest that a remarkable period of stability, stretching from the end of World War II through to the early 21st century, is coming to an end. The center of economic gravity is shifting from West to East, from advanced economies to emerging markets, from free markets to state controls and from established democracies to authoritarian and populist rulers. The transition is already upending global politics, economics and markets. This is just the beginning.
Much could happen to throw our projections off track. The Covid crisis is demonstrating how pandemics can reconfigure the global economic map. Wars, natural disasters and financial meltdowns can do the same. So could policy choices on globalization and climate change. Still, absent a crystal ball, forecasts of potential growth provide the most reliable basis for thinking about the long term.
Asia is returning to the center of the global economy.
As the chart above shows, at the turn of the century, with China yet to join the World Trade Organization and India’s potential buried beneath the License Raj, Asia accounted for just 25% of global output, substantially less than North America and Europe. By 2050, the continent that already hosts more than half the world’s population will also contribute more than half its economic output. North America and Europe will be in retreat.
Largely driven by the rise of China and India, the emerging-market share of global GDP is also soaring. In 2000, emerging markets accounted for about a fifth of global output. In 2042, they’re set to overtake advanced economies as the biggest contributors to global GDP—and by 2050, they will contribute almost 60% of the total.
More viscerally felt will be the shift in relative power between countries. In 2033, according to our projections, India will overtake an age-hobbled Japan to become the world’s third biggest economy. In 2035, China will outstrip the U.S. to become the biggest. By 2050, Indonesia may have moved into the big league. Three of the world’s biggest economies will be Asian emerging markets.
China as Challenger, Then Challenged
It’s optimistic to assume that all these transitions will be smooth.
The idea that war between ruling and rising powers is inevitable—labeled the Thucydides Trap by Harvard political scientist Graham Allison—is contentious among scholars, but the intuition is compelling. You don’t need to buy the entire theory to agree that shifts in the balance between great powers are fraught with risks.
The looming handover from the U.S. to China has already triggered fights that began over trade and spilled into technology, human rights and territorial claims. The Trump administration might mark a low ebb for diplomacy, but the underlying tensions—as China’s relative strength waxes and America’s wanes—aren’t going away.
And the rivalry between the two biggest economies isn’t the only geo-political risk on the horizon.
By the 2040s, the combination of an aging workforce and development fatigue is set to drag China’s annual GDP growth down to around 3%. India, with a younger population and significant room to catch up, will likely be clocking a faster pace. There’s already plenty of tension between the world’s most populous single-party and democratic states—this year they engaged in a bloody border skirmish—and it’s likely to escalate with India’s rise to challenge China as the Asian hegemon.
The State Strikes Back
For the past forty years, since the Reagan and Thatcher revolutions, the free-market ideal has been the organizing principle for the global economy. In the next thirty years, the balance between the market and the state is set to change. Economies with high levels of government ownership and control are in the ascendancy.
The share of global output coming from economies that are “free” or “mostly free” is set to slide from 57% in 2000 to 33% in 2050, based on Bloomberg Economics’ GDP forecasts and the Heritage Foundation’s classification system. The share from those classed as “mostly unfree”—economies with a high degree of state ownership and control—is set to rise from 12% to 43%.
It’s possible that state-led economies will allow a bigger role for markets—but it’s far from guaranteed. India is liberalizing. China is not. Indeed, President Xi Jinping has called for state firms that are “stronger, better and bigger.”
And transitions can take the opposite direction, too. Free-market economies have been finding it tough to maintain the benefits of openness and dynamism in the face of competition from state-led rivals. Since 2016, the U.S. has imposed tariffs on hundreds of billions of dollars in Chinese imports, signed a trade agreement that dictates what China should buy, required U.S. firms to obtain a license before selling certain technologies to China and attempted to break up a major Chinese internet firm.
In other words: the fear of China’s rise has already begun to turn the U.S. away from free-market principles.
And those shifts are more than just idiosyncrasies of the Trump administration. All over the world, the rise of state-centered economies—pursuing mercantilist trade policies and a free-rider approach to intellectual property—is sowing doubt about the free-market system. Is it the best approach to driving growth—or a fast track to giving away competitive advantage and ultimately geo-political power?
There’s a similar trend in politics. In 2000, “free” societies—shorthand for functioning democracies, as defined by Freedom House—accounted for 86% of global output. By 2050, that share is set to shrink to about 60%. “Partly free” societies—with incomplete political rights and civil liberties—and “unfree” societies that impose draconian controls will by then account for almost 40%.
The rise of alternative models, in government as in economics, poses questions that the West has so far proved unable to answer. The Trump administration has focussed global attention on the far-reaching implications of China’s ascent. But there’s not much sign that this has triggered a necessary rethink of state capacity. Instead, the reaction so far has been a combination of nationalist chest-thumping, barricades at the border and an appeal to strong-man rulers to take the situation in hand.
Facing the Future
There’s still time for a goldilocks scenario to unfold. For the U.S. and Europe, that would mean advocacy of free markets and free minds abroad is matched by investments—in education, infrastructure and research—that will boost domestic potential. For China, a more open society and a return to the market-reform path followed so successfully in the 1990s and early 2000s, would be a win-win—driving dynamism at home and easing tensions abroad. For India, accelerating the pro-market reforms launched by the Modi government will be critical to delivering rising prosperity.
More likely, on the current evidence, is that a self-reinforcing dynamic kicks in. As they grow, China and India will benefit from massive domestic markets—providing national champions with enormous economies of scale and acting as a lure for foreign firms and their technology. Rapid growth and—for China—the near-term prospect of climbing to the top of the global economic rankings, will provide a halo effect, obscuring any inefficiencies in the system. History is written by the winners—and economic rules will be, too.
For the free-market West, the dynamic may operate in the other direction. In the competition with state-dominated rivals, some aspects of openness and dynamism have already been sacrificed. Facing an unfamiliar world, voters have been more receptive to the siren song of populism than the farsighted strategies required to put their own house in order. A turn away from market dynamism in economics and toward nostalgic nationalism in politics, is not a recipe for long-term success.
In hindsight, the conclusion of the Cold War—hailed as the end of history—was really just the closing of one chapter and the start of another. The world is in the midst of a messy transition as the balance of economic and political power shifts from West to East, from free markets to the state and from democracies to authoritarianism and populism. For businesses, investors and policy makers, history isn’t over. It’s just getting started.
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Author: Tyler Durden