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Promise and peril of global change

by Hans-werner Sinn

MUNICH — Panta rhei. Everything flows.

This Greek aphorism often comes to mind when I think of the economic and political changes in my lifetime. They seemed as impossible before they occurred as they have felt natural in retrospect. Communism fell. Germany was united. The United States elected a African- American president. Now we are in a phase in which Asia is catching up with the West and U.S. hegemony is being challenged.

While American casino capitalism has collapsed, and America’s European economic satellites are suffering, China seems to have taken advantage of the situation, increasing its trade surplus amid the global economic crisis. Indeed, in the first four months of this year, China became the world’s leading goods exporter, overtaking Germany, the previous champion.

It is true that in other economic terms, China still lags far behind. Although China accounts for 20 percent of the world’s population, its share of global GDP currently is only 7 percent. By contrast, the U.S. and the European Union account for 54 percent of global GDP, despite having only 12 percent of the world’s population.

But these figures are changing rapidly, owing to China’s exuberant growth. From 1995 to 2008, China’s economy grew by 229 percent, while the world economy grew by 63 percent, the U.S. by 45 percent and the 27-member EU by only 37 percent.

It may be difficult for China to ever match the success of a small Asian country like Singapore, which has already overtaken the U.S. in terms of GDP per capita as measured by purchasing power parity. Yet China will undoubtedly become the world’s largest economic power in the foreseeable future. To achieve this leadership position, it needs less than a quarter of U.S. per capita GDP, because its population is more than four times larger.

The forces of globalization that were liberated by the fall of communism have created a better world, with rapid economic convergence and shrinking inequality. The proportion of people living below the World Bank’s poverty line of $1.25 a day shrank from 52 percent in 1981 to only 25 percent in 2005. More than 50 percent of the world’s population is now considered middle class, with a living standard above the average of the developed countries’ poverty lines ($8.2 at 1996 Purchasing Power Parity prices).

And the worldwide Gini coefficient of inter-country inequality fell from 0.653 to 0.556 from 1980 to 2007, owing largely to the astounding performance of the emerging countries, particularly China and India.

The development of the world has not been without problems, however. Carbon dioxide emissions have been growing fast, fossil-fuel resources are being depleted rapidly, and global warming has accelerated. Even if the U.S. embraces the Kyoto Protocol under President Barack Obama, the world’s temperature will break the record of the last 800,000 years in the next 30 years.

Moreover, huge waves of migrants from developing countries to OECD countries challenge the assimilation capacity of the latter and deprive the former of its educated workforce. In the U.S. and Germany, 13 percent of the population is foreign born, as are 8 percent of France inhabitants and 10 percent of Britain’s.

Unskilled migrants tend to come to Europe, where they burden the welfare state, and skilled migrants are lured to the U.S., although they are urgently needed at home. The brain drain is a problem not only for South America west of the Andes and many African countries, but also for Turkey, Italy, Britain, the Balkan countries, Germany and Finland.

Migration from developing countries partly reflects a problem that also triggered the current financial crisis: International capital flowed in the wrong direction. In recent years, the U.S. absorbed half the world’s capital exports, while China provided one-fifth of the total. In 2007 alone, the U.S. imported $790 billion of capital, while the emerging and developing countries exported $714 billion.

This made it possible for U.S. households to stop saving and enjoy an exorbitant consumption level, but it stood on its head the conventional wisdom that capital should flow from rich to poor countries, where it can more productively be invested. Since the world will not continue to provide the U.S. with goods in exchange for dubious financial securities, Americans will have to leave their dream world. They will have to brace themselves for an extensive period of diminished expectations that will last much longer than the next economic boom, and that will require substantial structural changes in the U.S. economy.

In the next few decades, the biggest challenge for the world will be peace, because the changing economic power structure will require corresponding political changes that the U.S., as the incumbent superpower, will not easily accept. The situation is similar to Germany’s challenge to British geopolitical hegemony in the 19th century, when the German economy blossomed. The resulting political tensions led to a second “Thirty Years’ War” that brought Western civilization to the brink of collapse. It can only be hoped that the political leaders who shape the course of the 21st century will be wise enough to avoid such an outcome.

Hans-Werner Sinn is a professor of economics and public finance, University of Munich, and president of the Ifo Institute. © 2009 Project Syndicate (www.project-syndicate.org)