14 March 2019

The Great Economic Powers of the Future

In an age of rising levels of nationalism and protectionism, the focus on economic competition between countries appears to once again be on the rise.  In fact, this competition has been a key factor in nearly all of the major events and trends that have changed the direction of world history in recent centuries, from technological breakthroughs to conflicts between major powers.  For a long period, Europe’s rival countries, most notably the United Kingdom, dominated the world economy and much of the conflict and rivalry between Europe’s leading states was driven by a desire to achieve or maintain the status of the world’s leading economy.  In the late 19th and early 20th centuries, Europe ceded economic leadership to the United States, a position that the US has held it ever since.  

However, the US is now facing a major challenge from China, whose four decades of unprecedented growth and vast size of its population have allowed it to rise from abject poverty and isolation to become a serious threat to ascend to the title of the world’s most powerful economy.  Likewise, the domination of the global economy by countries with wealthy and highly-developed economies is under threat by the rise of emerging markets, who have benefitted from their integration into the global economy in recent decades.  Another shift in the balance of economic power is occurring as economic power and influence is shifting from the West to Asia, as Asia has now overtaken the West as the leading driver of global economic growth and is increasingly becoming a center of innovation and change.  As the balance of global economic power evolves, competition between the world’s leading economies is likely to intensify. 

For more than three centuries, the West has dominated the global economy, thanks to the Industrial Revolution and its dominance of trade, investment and innovation.  However, this domination of the global economy by the West is coming to an end right before our eyes.  Sure, the United States remains the world’s most powerful economy by most measures, but its leadership of the global economy is being challenged.  Likewise, Europe as a whole remains a powerful economic force, but years of slow growth and a weakening position in many high-tech and high-growth industries has continued the erosion of Europe’s economic power and influence.  In contrast, emerging markets are on the rise, both in terms of the scale of their economies and their influence on the global economy.  Much of the recent success of emerging market economies can be attributed to Asia, where nearly all of the world’s most successful emerging markets are located.  China, obviously, has been the most noteworthy Asian success story in recent decades, but other economies such as India, Vietnam, Indonesia and the Philippines have also grown at a strong pace and are becoming major economic powers in their own right.  As a result, China is now challenging the US’ position as the world’s leading economy, while Asia as a whole is increasingly seen as the new center of the global economy. Altogether, Asia’s rise is leading to what can be described as a much more multilateral global economy.

We have already seen how the balance of global economic power has been transformed in recent decades.  Moreover, we can use the knowledge gained from the past few decades to analyze how the balance of global economic power will shift in the coming years.  In fact, by using ISA’s long-term economic growth forecasts, we can determine how the balance of global economic power will look in 25 years’ time.  In these forecasts, we can find some interesting trends. These include: 

  • A continued slowdown in developed economies.  From the 1950 to 1980, developed economies grew by more than 4% per year.  This fell to 3% in the 1990s and 2000s, and to less than 2% in the 2000s and 2010s.  Growth will slow to around 1.5% per year over the next 25 years.
  • The US economy will average growth of just above 2.0% per year over the next 25 years, a better performance than most other developed economies.
  • Economic growth in Europe will average just 1.3% over the next 25 years, with some southern European economies recorded little or no growth.
  • Japan’s economy expanded by just 1.0% per year over the past 25 years and will grow at an even slower pace over the next 25 years.
  • Economic growth will also slow in most emerging markets, but not to the degree as in developed economies, as opportunities for export growth will be reduced.
  • China’s economic slowdown will continue, with average annual growth falling to 5.5% over the near-term, 4.5% over the mid-term, and 3.5% over the longer-term.
  • India will be the fastest-growing large economy over the next 25 years, with average annual economic growth of 7%.
  • Southeast Asia will also remain a center of global economic growth, with countries such as Vietnam, Indonesia and the Philippines all growing at a strong pace.
  • Latin America will continue to trail well behind Asia in terms of growth, but the region will gradually pull out of its recent slump.
  • Growth rates are forecast to be a little higher in the poorest emerging markets, but declining export opportunities will stunt their growth potential.

Given this forecasts for economic growth over the next 25 years, we can determine how the balance of global economic power will look in the year 2044.  By that time, China will have overtaken the United States to become the world’s largest economy, although China’s slowdown will delay its rise to the top spot until the 2030s.  Still, the US will remain much larger than any other economy outside of China. Meanwhile, India’s rise will become more apparent, as it will easily be the world’s third-largest economy in 25 years’ time.  In contrast, many of the developed economies that were among the world’s largest economies in recent decades will fall further behind their larger rivals. Instead, the world will have a new economic configuration.  Whether or not this is a sort of G2 (China and the United States), a G3 (China, the United States and India) or a G4 (China, the United States, India and the European Union) remains to be seen.  What is sure is that a more multipolar global economy is emerging.

Of course, there are many variables that could dramatically alter the direction of the global economy over the next 25 years.  For example, geopolitical changes could dramatically alter the fortunes of some or all of the world’s largest economies in the years ahead, especially if major conflicts break out among some of the leading economic powers.  Another variable is the potential for major disruptions in global trade and investment, something that might already be taking place as protectionist policies are being enacted in many of the world’s leading economies.  Of all of the variables that have the potential to shake up the balance of global economic power in the coming years, technology may be the greatest.  In fact, we are seeing a battle for technological supremacy already underway between the world’s two leading economic powers, the United States and China.  While these variable could disrupt the global economy in the coming years, we can still learn much of analyzing long-term historical trends, as they help us to determine long-term future trends.  In fact, given our deep understanding of the near-term and long-term history of economic trends and developments, we can say with much confidence that the balance of global economic power will look something like this in 25 years’ time. 

So, it is clear that a new struggle for global economic leadership is underway.  In fact, China’s challenge to the United States’ (and the West’s) economic leadership is well and truly underway and will certainly intensify over the next 25 years.  In fact, both of these superpowers will likely compete for influence in different industries, technologies and markets, each trying to maintain or gain a position of leadership in many different economic areas.  European economies will also try to maintain a large voice in global economic affairs, but sluggish growth and a fragmented European Union will limit Europe’s ability to remain at the top table.  In contrast, India will emerge as an increasingly important economic force in the world, although it is unlikely to match China’s dramatic rise of the past 40 years.  Overall, countries that are today classified as emerging markets will become increasingly important players in the global economy.  All of these changes are evident today and will only become more so over the next 25 years.  In fact, barring some unforeseen dramatic events, it is fairly easy to imagine what the balance of global economic power will look like in the year 2044.