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Gravity of Global Power Moving From West to East
This is the first in a six-part series of articles on the rise and fall of economic and business empires following the global financial crisis triggered by the bankruptcy of Lehman Brothers. The series is part of the projects on the occasion of the 59th anniversary of The Korea Times, which falls on Nov. 1.
By Kim Jae-kyoung
Staff Reporter
The year 2009 was a milestone for Korea as it was hit hard by the global financial crisis but recovered at the fastest pace among major economies, demonstrating its capability.
On top of that, Asia's fourth-largest economy joined the league of global powers by capitalizing on the power shift that is moving the center of politics and economics toward the Pacific from the West.
In April, the country upgraded its status to a "rule maker" from a "rule taker" by joining the Financial Stability Board (FSB), the club of global financial powers. In September, it was named to host the Group of 20 Summit in November next year, becoming the first Asian country to hold a meeting of the world's 20 major economies.
Although Korea has managed to weather the global crisis, now it is time to see the big picture and become a real winner in the post-crisis world. The world economic order is undergoing major changes with the rise and fall of economic and business empires.
Rise of China, Fall of US
Following the Wall Street crisis, U.S. hegemony has been gradually eclipsed by the rise of new economic powers such as China, Brazil and India, indicating that the gravity of global power is moving from the West to the East.
This major transition will affect the global economy through multiple channels. Namely, there will be slower financial globalization, major currency adjustments and higher macroeconomic volatility as the global economy exits from extraordinary policy measures. In particular, it has huge implications for Korea because the country is sandwiched between the U.S. and China.
Few raise doubts that China and Brazil will become major forces in the future. Even though these economies are losing growth momentum in the wake of the global crisis, they are expected to sustain high growth rates. In particular, the rise of China is expected to change the order of the global economy and finance.
"The rise of China, whether it has become dominant or not, has shifted the center of gravity of global politics and economics toward the Pacific," Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.
"Also, China is developing strong links in Africa and Latin America. China is changing the face of the global economy more than any other country since World War II," he added.
According to a Goldman Sachs report, China will dominate the global economy in 2050 with a GDP of $70 trillion, followed by the U.S., India, Brazil and Russia. The global investment bank expects China to overtake the U.S. in GDP by 2027.
Zero Sum Game?
It well may be that the world is evolving toward Pax Sinica, but many experts think that the world is in a long transition period, one characterized by a truly polycentric world - the U.S., EU, Japan and China.
They argue that although China will certainly become more of a superpower, it will not rival the U.S. any time soon. They point out that the ongoing change should be seen as a process of global rebalancing.
"I prefer to think about it as a rebalancing. Rebalancing is a zero-sum game because by definition the things you are balancing must sum up to unity," ING Group senior Asia economist Tim Condon said.
"But China's rise is not at the expense of the U.S., where rapid productivity growth and strong institutions will sustain a high and rising standard of living. In fact, closer integration with a rising China will make both countries even better off.
Standard Chartered Group U.S. economist David Mann echoed the view, saying, "The U.S. will remain the largest economy in the world for the coming decades, though China and India are going to be narrowing the gap. The depth of the U.S. capital markets is also likely to remain unmatched for a long time to come."
"We expect some more diversification away from the dollar in terms of trade transactions and central bank currency reserves. However, the dollar is likely to retain its role as the primary currency of choice for trade," he added. "Asian markets are likely to see significantly more capital flowing into them as investors' decisions increasingly reflect the shift in economic power from west to east."
Another implication of the global power shift is that it will mark the end of an era in which the rules of the global economy were essentially set by a democracy committed to free trade and capital movement.
"From now on, the rules will have to be made in partnership with a non-democracy that likes to bend the rules on trade and maintains capital controls," said Niall Ferguson, a world-renowned history professor at Harvard University.
Blessing or Curse for Korea?
Since Korea is sandwiched between the U.S. and China, the power shift could be both a blessing and a curse. Depending on how it copes, Korea's future could turn out very differently.
For Korea, it is critical to play a broker's role between the two economic giants as a junior partner. At the same time, the country needs to make utmost efforts to capitalize on its position as the chair country of the 2010 G20 summit.
Guillen of the Wharton School said, "It has the potential of being a broker between the U.S. and China. It can be a junior partner in an increasingly important trans-Pacific relationship.
"Korea's location is superb. It is more advanced technologically than China, especially in electronics. Korea could position itself with Japan as the two key Northeast Asian economies that profit from trade with China and from complementing China's skills."
Mann pointed out that countries that were less (economically) leveraged and are more able to boost growth through domestic consumption are expected to be winners, a group that includes China, India, Brazil, Korea and Indonesia.
"Korea is well placed to benefit from increased investor attention toward Asia. Allowing a strong currency and boosting domestic demand while still working to produce world-class goods and services for export will help in this process," Mann said.
"The key challenge may be that China may move ever faster up the value chain, challenging the position of leading producers worldwide, including Korea."
In addition, it will be very important for Korea to play a leadership role in Asia's economic integration.
"Korea should take advantage of its position as the chair country for the G20 process in 2010 in order to launch and strengthen East Asian economic diplomacy and promote East Asian economic integration and economic policy coordination for the region's contribution to the balanced and sustainable growth of the world economy," National Strategy Institute President Young Soo-gil said.
kjk@koreatimes.co.kr
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