Europe and the United States are losing their economic dynamism and dominance. Asia and new emerging economies are becoming the major drivers in many markets.
KNOWLEDGE @BI: Torger Reve on Global Economic Shift
The global economy is rapidly changing. Europe and the United States are losing their economic dynamism and dominance, and Asia and new emerging economies are becoming the major drivers in many markets. What used to be a Northwestern world is rapidly becoming a Southeastern world. This has long-term implications for global trade patterns and global shipping.
I did my PhD in business at Northwestern University in Chicago. Northwestern University was founded in 1851 to serve the Northwest Territory in the United States. 40 years later came University of Chicago, another top rated research university. At that time the Northwest Territory was the frontier. Many immigrants had left the old world of Europe to seek prosperity in the new world of North America.
The United States was still a weak nation, but it had the entrepreneurship and the innovation that gave the United States the economic lead. The American people believed in God, in hard work and in Yankee dollars.
Knowledge, innovation and hard work built North America
Although most immigrants to North America were farmers and industrial workers with little or no education, they established colleges and universities very early. The first British settlers at the American East Coast established Harvard University as early as 1636, followed by Yale University four years later. The movement was always to the North West, from the East Coast of New York and Boston, to the Mid West of Chicago to the West Coast of California and San Francisco. The two world class universities there today are University of California Berkeley (founded in 1868) and Stanford University (founded in 1876). Stanford University has produced Silicon Valley, and the majority of the IT industry has its roots there.
The United States were driven by education, research and innovation, in a way the world had never seen before. It was not only the abundance of land and the promise of gold in California that built the United States.
It was entrepreneurship and business innovation that created the strongest economy in the world. Think of what Ford did to the auto industry, what Edison did to electricity, what Bell did to telecommunication, and more recently, what Bill Gates and Steve Jobs did to computers, just to name a few. The drive for industrial competitiveness is as strong as the drive for reproduction.
Europe dominated the seas
The western civilization has its roots in the South East of Europe, in Greece and Rome, and in the Middle East. The economic dominance of Southern Europe lasted for centuries. Just consider the Spanish dominance of the seas, with Christopher Columbus discovering America in 1492, and the Spanish settlers in Latin America.
Stanford University in Palo Alto, California has Spanish sand stone architecture, dating back to early Spanish settlements in California. Then the United Kingdom became the dominant political and economic player in the world, extending the British Empire from Europe to Canada, India, South Africa and Australia. Again dominance of the seas was a major factor in becoming a world power.
In the 19th century the United States took over as the dominant economic player for reasons outlined above, developing some of the largest multinational corporations, combining technological and marketing power, as well as controlling the financial markets. Wall Street and City of London were the bankers of the world, until they met the recent financial crises. United States helped Europe and Japan to recover after World War II, but this also signaled the next move to the north west, the era of Asia.
Asia gains global economic power
Japan soon emerged as the second most powerful economic nation, taking leadership in shipbuilding, manufacturing technologies, autos and consumer electronics. Soon, South Korea followed much of the same path, along with Taiwan and South East Asia. But the big change in world economy came with China’s transformation from a socialist economy into a market economy, led by the market reforms of Deng Xiaoping. China soon showed double digit annual growth, and today China is the world’s second largest economy, expected to pass the United States in less than five years.
Today there are concerns among economic observers that the growth in China is slowing down, creating a decline in world trade and even a world recession. The western economies of the United States and Europe, actually most of the OECD countries, are still struggling to recover from the recent financial crisis, starting at Wall Street in 1998. The worst cases are found in Latin Europe, in particular Greece, Spain, Portugal and Italy.
New emerging economies are catching up
In the mean time, the Asian economies are not slowing down as much as expected. In fact, there are brisk growth figures not only in China, but in all the emerging economies. Extensive infrastructure investments have replaced exports growth, and domestic consumption is picking up. The BRIC economies of Brazil, Russia, India and China have to be extended by new emerging economies, such as Turkey, Mexico, South Africa and Indonesia . Many of these countries have emerged as attractive investment targets, due to a combination of economic and political reforms.
Thus the current economic transformation is toward the South East. Today, East Asia as a block is the strongest economic area in the world, but more and more of South Asia is included in the rapid growth toward economic prosperity. South East Asia has been there for some time already, in particular Singapore, Malaysia and Thailand, but alsoVietnam , Philippines and Indonesia have become fast moving economies. The largest growth, however, is expected to come from India. India has a lot of internal problems due to its vast population, its poverty and its poor infrastructure, but somehow India is functioning quite well, in particular in the software industry, in business process outsourcing and several other industries.
The Indian advantage is relatively well functioning institutions (based on their British heritage), a good educational system, and the ability to use English. India will remain a new economic power despite all its internal problems. And new developing economies are entering the prospects for higher economic growth, in particularly Bangladesh and Myanmar. These are two of the Asian countries that will take over manufacturing from China and Taiwan, along with Vietnam and Indonesia, as the Chines cost level is rising.
Highest growth rates in South East Africa
Most recently there is even one more move toward the South East that is more unexpected than the rise of Asia, and that is the high growth of South and Eastern Africa.
South Africa has already been on a path toward prosperity since Nelson Mandela introduced democratic rule, but the new development is that countries such as Kenya, Tanzania, Mozambique and Angola are reaching double digit growth figures. These countries are rich in natural resources, not only minerals, but also in energy. The green sector is booming in some of these countries, as new infrastructure makes market access easier.
Foreign direct investments in South and East Africa are growing, with China taking the lead. The Chinese recipe seems to be working in Africa the same way it has been working in China, infrastructure, manufacturing, opening up markets while keeping government control over key sectors.
A growing middle class is about to create relatively strong consumer markets, attracting retailers and service providers from abroad. Indian and Arab merchants also play an important role in the economic development, and the glittering Gulf States seem to be well positioned given their strategic location near the Indian Ocean. The Indian Ocean may soon be as important in seaborne trade as the Atlantic and the Pacific Oceans are today. The Northern Sea Route will remain insignificant for many years to come.
Shift in global trade and global shipping
What do these long trends do to global trade and global shipping? Trade and shipping always depend on economic growth. Thus the success of the South East is critical to the success of shipping. Furthermore, the pattern of transportation is likely to change significantly in the years to come.
This also means that new shipping nations will emerge, as the investment opportunities in shipping become transparent. China is already strong, and India is moving up, along with some Middle East nations with an abundance of capital.
A special analysis is needed to understand the new world of energy and energy transportation. So is the impact of climate change. Shipping remains the most energy effective way to move goods, and the world needs to trade and transport in order to prosper.
This article is published in HELM Magazine Issue #02/2013. HELM Magazine is a customer magazine published by Wilhelmsen Ships Service.
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Text: Torger Reve, Wilh Wilhelmsen Professor of Strategy and Industrial Competitiveness at BI Norwegian Business School.