Economic revolution: Hope or delusion? (2)

This is the second of two articles examining major shifts in today's global economy.

By Paulus Usmanto Njo

PERTH, West Australia (JP): There was a time when the Third World was awash with dissent and pessimism over the way the world economic cake was sliced. The trend is reversing itself. This, however, is taking place quite unevenly. Some of the more successful developing countries are rapidly catching up with the rich world, while others remain deeply mire in economic stagnation. It is probable now that the emerging economies of China, India, Indonesia and a few others will one day be bigger than some, or even all, of today's G-7 economies.

Lessons from history do suggest that the pendulum of economic supremacy, both in economic size and income per head, will one day swing toward several of the developing countries of today.

The Economist's recent survey on the global economy illustrates this natural process of overtaking. Just as Britain became richer than Holland in the late 18th century and America swept ahead of Britain in the late 19th century, catching up is always easier than being the economic leader. Producers in less developed countries can simply imitate others' methods and technologies at relatively lower costs, whereas rich countries have to devise new technologies to maintain rapid growth.

As proven by history, the pace of economic development has become quicker over the years. The industrial revolution in Western Europe during the 18th and 19th centuries was a slow affair compared with growth rates today.

The Economist's survey documents that after the industrial revolution took hold in about 1780, Britain needed 58 years to double its real income per head. From 1839 the United States took 47 years to do the same; starting in 1885, Japan took 34 years; South Korea managed it in 11 years from 1966; and more recently still, China has done it in less than 10 years.

The survey estimates that by the year 2020, China, India and Indonesia could rank among that world's five biggest economies. It will be for a while, though, before per capita incomes could follow suit.

There is one important note to make here. The economic revolution on a global scale will unlikely be a story about growth in some countries at the expense of that of others. More likely, the global economic machinery of the future will be capable of paying dividends to all, although active economies will get more than passive ones.

The survey by The Economist further points out that the present expansion in international trade and capital flows is breeding many similarities with the 19th century, when investment and trade also exploded between Europe and the countries of the New World, such as the United States, Argentina and Australia. While the output of these "emerging" economies swelled, they created fast growing markets for European goods and offered high returns on overseas investments. However, this early attempt at globalization was derailed by two world wars and the depression of the 1930s.

Even today's early phases of economic globalization have not been a restriction-free process. There are both plausible and implausible reasoning to contend with. Indeed, despite the promise of common good, realignment in productive capacities to some degree brings about both winners and losers, at least temporarily.

Fears that producers in developing countries will steal output and jobs in the rich countries have translated into lobbying mechanisms against the "unfair" business practices of the Third World. Producers of labor-intensive, low-technology manufactured goods in the rich countries, the likely losers in the process, have been on the forefront of this movement.

Exploitation of labor, failure to maintain eco-friendly production systems, dumping, and disregard of intellectual property rights have become familiar themes. The movement in the West has expanded, somewhat outside the business circles, but not necessarily unrelated, to cover the wider issues of human rights and democracy.

The above discrepancies will likely be self-healing. Through balancing negotiations, and as economic progress brings about improved working conditions, better production technologies and increased recognition of intellectual property rights in the Third World, matters will be gradually resolved. Proven gains from economic globalization in the rich countries may also soften their own claims. If the experience during the 19th century is not sufficient to draw a confident note, even current trade estimates indicate that the tripling of the Third World's exports during 1986-1995 is to be accompanied by more than the tripling of their imports.

According to the data furnished by the IMF, developing countries, as a group, always had trade surpluses until 1991. Their trade balance has turned negative since 1992, and the deficit has been rising. In terms of services and trade, developing countries as a whole have had perennial deficits, and the trend is unlikely to change in the foreseeable future. Indeed, Japan, Germany and Italy have continued to enjoy the world's largest trade surpluses.

In turn, the huge bills for infrastructure development in many developing countries will create business opportunities for suppliers, developers and consultants from the rich countries, many of whom have seen their home markets somewhat saturated. As people in developing countries become richer, their spending power will naturally increase, thus expanding the market for goods and services from the rich countries.

Perhaps, a more credible note of caution concerns the possibility of global macroeconomic imbalances. As the competition for capital is heightened, interest rates may rise rather out of control, and choke growth.

Today's speculative pattern of capital flows, which is distinctly different from the pattern during the 19th century, may also create disruptive volatility and set the globalized world on highly unstable footing. Furthermore, increasing demands may cause the price of certain "strategic" commodities, such as oil, to rise dramatically -- a repeat of the two "oil shocks" in the 1970s and 1980s -- and cause widespread inflation and stagnation. All of these possibilities, nonetheless, still require further examination.

Paulus Usmanto Njo is working toward his doctorate degree at the Asia Research Center, Murdoch University, Western Australia.