The Global Economic Balance of Power

Throughout modern history, the global economy has been dominated by the developed economies of North America, West Europe and East Asia.  In particular, the United States and the larger West European economies were able to dominate the global economy to an extent that it allowed this handful of countries to establish and defend the rules, regulations and norms that are now the standards for the global economy.  However, developments such as the rise of the world’s giant emerging markets and the demographic decline of many of the world’s leading developed economies means that the balance of power in the global economy is changing rapidly.  If the developed world seeks to defend its position and privileges within the global economy, then a two-track economic governance system may emerge, to the detriment of all economies around the world.

Today, the United States and the European Union remain the world’s leading economies in terms of scale and wealth and these two powers control most international organizations dealing with international economic, trade and investment issues.  By most measures, the United States remains the country with the world’s largest economy, while the EU’s total economic output is similar to that of the US when the GDP of all 28 members of that organization are combined.  However, this domination of the global economy by the US and the EU is being increasingly challenged by China, as three decades of rapid economic expansion have given China an economy that is larger than that of any other country in the world outside of the United States.  Moreover, Chinese economic output will overtake that of the US in the near future, barring a major economic collapse in China.  As a result, China is leading efforts by the world’s largest emerging markets to challenge the pre-eminent position of the US and the EU in the global economy, and is having much success in doing so. 

The creation of the BRICS group of countries (Brazil, Russia, India, China and South Africa) is one sign that the world’s emerging markets are working together to reshape the governance and management of the global economy.  Together, the five BRICS member states have a population of nearly three billion and a total economic output that is nearly equal to that of the United States or the European Union.  Meanwhile, with the developed world, particularly smaller European countries, desperately attempting to defend their unjustified positions in key economic bodies such as the IMF or the World Bank, emerging markets are turning away from these organizations in favor of newer organizations that reflect their true impact on the global economy.  The most notable example of this is the Asian Infrastructure Investment Bank (AIIB), the Chinese-created (and dominated) investment bank designed to boost investment in infrastructure projects across Asia.  The United States, in particular, resisted the development of the AIIB, but China’s economic clout was enough to convince most large economies to join that new organization. 

Looking ahead, there are many signs that suggest that the divisions between the developed world and the emerging world over the governance of the global economy are widening.  For example, the poor long-term economic prospects for Europe and Japan are weakening the overall position of the developed world and are allowing emerging markets to continue to increase their share of global economic output.  Likewise, bilateral trade and investment deals between emerging markets are rising sharply and often exclude most developed economies.  If this trend continues, it could have a negative impact on global trade and investment, as a two-tier system divides the world into rival economic blocs.  To avoid such a scenario, the developed world must acknowledge the rising economic power of many of the world’s leading emerging markets and allow them to have much greater power within the world’s existing economic, trade and investment organizations.  Not do to so would prove to be yet another drag on global economic growth and could exacerbate global geopolitical tensions.