http://www.thetimes.co.za/PrintEdition/BusinessTimes/Article.aspx?id=677725
COMMENT: The baton of world economic power is being passed eastward THE SUNDAY TIMES, LONDON Published:Jan 13, 2008 _____ 'There may be a nasty sting in the tail from the Chinese dragon' AS WE enter 2008, the countdown is well under way for August's Olympic Games in China. Yet, months before the Olympic torch sparks into life in Beijing, China and its fellow Asian nations have already raced into a position of global leadership. This year, emerging-market nations, led by Asia, will overtake the rich countries of the developed world to become the most important collective engine for global growth. As the mighty US economy falters and once so-superior Europe stumbles, China, for the first time since the early 19th century, will become the largest national contributor to world economic expansion. That will be true whether China's impact is calculated by measuring what it produces at market value, or after making adjustments so that a dollar would buy the same goods if it were spent in Beijing or New York. This historic, presumably temporary, passing of the baton of global economic leadership from the West to the emerging powers of Asia is a moment as remarkable as the breaking of the four-minute mile. However, as Western governments confront the industrial world's diminishing prospects in what will be their most testing year since the start of the century, the passing of this milestone has left markets fretting over two crucial questions. First, can these emerging markets really sustain their outperformance, charging ahead at the front of the field even as the big economic powers of the Group of Seven (G7) developed countries fall behind? Secondly, will their stamina help to sustain the West's failing performance? The good news is that the odds look very much in favour of Asia and emerging markets sustaining their strong performance this year despite the plight of the G7, a phenomenon that economists have dubbed "decoupling". The bad news is that while this trend will help to bolster global growth, its benefits to the industrialised world will be limited and are likely to come at a significant cost, both literally and metaphorically. Scepticism over the decoupling idea remains pervasive among financial markets as well as policymakers. The old dogma that if America sneezes the rest of the global economy must inevitably catch a nasty chill remains a deeply rooted piece of conventional wisdom - understandably so, since investors or governments dismiss the potency of the US economy as a driving force at their peril. Yet the reality is that this familiar prognosis of inescapable global contagion from America's ills is almost certainly misplaced. Crucially, the exposure of Asia and other emerging markets to this US downturn is vastly less than their vulnerability to the fallout triggered by the dot-com bust of 2000. In the previous US downswing, there was no escape for emerging markets. The huge bubble in internet and technology-related shares was not only an American but also a worldwide trend. When Wall Street fell, stock markets across the world, including those in emerging markets, were unavoidably hit. The impact of the financial toll on Asia was then magnified since the region's factories were the world's workshop for huge quantities of the high-tech gear for which demand abruptly slumped. This time round, things are drastically different. The origins of US economic woes lie in its residential housing market, a sector that has its impact almost wholly within America's borders. As Merrill Lynch puts it: "The world does not build American houses." True, the knock-on effects of the US housing slump have spread across world markets thanks to the vast losses inflicted on financial institutions by greedy and misplaced bets on home loans to "subprime" borrowers. Yet most of these losses appear to be shouldered by American and European banks, with Asia so far little-affected. Emerging markets are also poised to benefit from an influx of footloose global capital fleeing more vulnerable Western economies, which will help to bolster Asia's momentum. As America cuts interest rates to shore up activity, and the productivity and profitability of its companies wilts, funds are likely to seek out higher Asian returns. These encouraging circumstances suggest that the decoupling theory is set to be borne out in practice. Asia's pumped-up economies, which have worked hard to become fitter and readier for the testing times of another world slowdown, may emerge as the clear winners from the downturn that is taking hold. Asia's likely resilience this year should offer at least some support for the West's flagging growth. Importantly, it will provide a market for rising US exports made more competitive by a sliding dollar as the big global imbalances of the past decade begin to unwind. There may, though, be a nasty sting in the tail from the strength of the Chinese dragon and its Asian cousins. The likely blow comes from the serious danger that the persistently buoyant growth in emerging markets, even as the industrial economies slow, will inflame inflationary pressures in the West by driving up key commodity prices, especially for foods, metals and oil. This danger is compellingly spelled out in a new analysis by Stephen King, chief economist at HSBC. In the past, the global weight of the West's demand usually meant that when its big economies slowed, commodity prices would drop. Now, however, King finds that this relationship is breaking down as Asia's immense appetite for resources prevents commodity costs subsiding, even as growth falls in developed economies. The implications are ominous. The clear threat is that G7 central banks, fighting to protect growth in the West, are liable to find their scope to cut interest rates badly hampered by commodity-driven inflation imported from emerging markets. The passing of the torch of global growth to Asia may yet leave the West's hands badly singed. And, at 100 a barrel, oil is funnelling vast sums of money from the consumers to the producers, mainly in the Middle East, Russia and Venezuela. The value of the producers' oil exports has rocketed. They are now worth 750-billion a year to the Middle East. Governments there have paid off debts, invested in new industries and are building vast new infrastructures. The Gulf property boom makes Britain's housing market look like a backwater. Saudi Arabia is building four new cities, including the 27-billion King Abdullah Economic City, said to be three times the size of Manhattan. "The oil producers have got a lot more absorptive capacity - they can use a lot more wealth," said David Butter, Middle East expert at the Economist Intelligence Unit. "If you look at Saudi Arabia, it is investing a lot back into oil, gas and petrochemicals. Others are building up other sectors of their economies." Middle Eastern oil producers, and the booming economies of Asia, now have so much cash sloshing around that they are buying large stakes in Western assets. Their so-called "sovereign fund" investments are estimated at 2000-billion and could reach 12 000-billion by 2012, according to the International Monetary Fund. When Citigroup, the US bank, found itself in need of help because of America's subprime mortgage crisis, it turned to Abu Dhabi's Investment Authority. UBS tapped the Saudi royal family. Other troubled banks have looked to China or Singapore. Should this be cause for concern? Willem Buiter, former chief economist of the European Bank for Reconstruction and Development, has warned: "As agents of the state, these funds are always potential instruments of foreign policy." It is not just in the Middle East that oil money is being used to buy power and influence. Hugo Chavez, Venezuela's erratic president, has been offering cheap oil and low-cost loans throughout Latin America. High oil prices have transformed Russia from an economic basket case into a powerful force that allows President Vladimir Putin to strut his stuff on the world stage. For some, the return of Russian power is the most alarming aspect of the energy price boom. "Putin's whole ethos is that if Russia can't be a military superpower, it can project economic power," said James Nixey, from the Royal Institute of International Affairs. Gazprom, Russia's state-owned energy giant, is trying to strike a deal to give it access to vast energy reserves in Nigeria, which has previously dealt mainly with Western energy companies. It all adds up to a significant shift of financial, economic - and ultimately political - power, say some experts. China, India and the other fast-growing economies of Asia are not immune from high oil prices but have sufficient momentum for it not to slow them in their tracks. They also have growing financial muscle and are using it to invest strategically in the advanced economies. It is these advanced economies, however, that are struggling under the weight of the credit crunch, high energy prices and their own indebtedness. The economic baton is being passed on, it appears, and high oil prices are accelerating the process. Niall Ferguson, the historian, sees the present record oil prices and the global credit crunch as analogous to the '70s - not the 1970s, but the 1870s, when the once mighty Ottoman empire lost economic, financial and, finally, political power. "Then the shift was from the ancient oriental empires to Western Europe," he said. "Today the shift is from the US - and other financial centres - to the autocracies of the Middle East and east Asia." - Gary Duncan, David Smith and Holly Watt.
<<image001.gif>>
<<image002.jpg>>
<<image003.gif>>
<<image004.gif>>
