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Hark the trends that will mould the world economy
Powerful forces are changing how we live and work on a global level. The indomitable rise of China and India and other emerging economies, the rapid spread of digital technologies and the growing challenges to globalisation as tariff and trade disputes dominate global headlines are all roiling business, the economy and societies.
At the World Economic Forum's annual meeting in Davos this week, the implications of these forces and the future of trade and other cross-border ties is certain to be on the agenda.
Let's start with globalisation. The first wave began in the 1980s and was characterised by cross-border flows of goods and finance.
Trade in goods and services as well as financial flows all grew rapidly for more than two decades, rising from about 20 per cent of GDP in the mid-1980s to more than 50 per cent before the 2008 financial crisis broke the momentum.
Capital flows took the hardest knock, falling from 22 per cent of global GDP in 2007 to just 7.5 per cent in 2017. Goods' trade has also flattened.
Today, we see two very powerful forces that have stepped in to fill the gap and are now driving interconnectedness: the shifting economic center of gravity to the south and east and cross-border flows of data.
The geographic shift is being fuelled by the rapid growth of some emerging economies and the high-performance companies that they are spawning. Emerging economies have accounted for almost two-thirds of global GDP growth and more than half of new consumption in the last 15 years.
For the first time in history, these economies are contributors to more than half of global trade flows. South-south trade (between China and other developing countries) is the fastest-growing. South-south trade rose from 8 per cent of the global trade total in 1995 to 20 per cent in 2016. By contrast, north-north trade has dropped from 55 per cent of the total in 1995 to 33 per cent today.
Data flows take the form of e-commerce and digital flows of information, searches, video, communication and intracompany traffic.
Cross-border data bandwidth grew by 148 times between 2005 and 2017 to more than 700 terabytes per second - larger than all the data contained in any of the world's largest libraries - and is projected to grow by another nine times in the next five years as digital flows continue to surge.
This surge in data usage is partly a reflection of soaring consumer demand, but also a manifestation of the increasingly connected world of business, as digitisation, the Internet of Things, and automation and AI are increasingly adopted in the workplace.
INTENSIFYING ROLE FOR EMERGING ECONOMIES
Underlying these findings are some tangible shifts: the power of emerging market companies, the role of China and global value chains.
First, emerging-market companies have been capturing an ever-larger share of the global profit and revenue pool. These firms account for about a quarter of total global revenue and net income, but are driving 40 per cent of the revenue and income growth. This acceleration is proven by the addition of more 120 Asian companies on the Fortune Global 500 list since the year 2000.
Second, China's role is shifting. Where it was once the factory of the world, it is now becoming a global investor and consumer. Indeed, China's exposure to the world when measured by the magnitude of flows of trade, technology and capital is actually declining, even as the world's exposure to China on these same dimensions is increasing. In other words, China is on its way to developing its own consumer economy, but also becoming one of the hubs for the new globalisation, along with the EU and US.
Third, global value chains are shifting. Previously, globalisation was about making the most of labour arbitrage and tapping new markets in emerging economies. What we see today is that these value chains are being reshaped by technology, which could amplify the shift to more localised production of goods near consumer markets.
Shifts in global demand are also having an impact, as China and other emerging markets consume more of what they produce and export a smaller share.
Goods-producing value chains have become less trade-intensive but more knowledge intensive, reliant on highly-skilled labour - and more focused on services. At the same time, intra-regional trade is on the rise: the share of global goods trade within regions has increased by 2.7 percentage points since 2013 - a rise that is largely propelled by China and the rest of Asia trading more regionally and less globally, going by our latest research.
NEW DYNAMICS FOR THE NEW ERA OF GLOBALISATION
The political ramifications of these shifts have yet to play out in full. Already, though, we can see some important implications, assuming the momentum continues. Asia is becoming the new globalisation powerhouse. By 2030, developing countries led by China and emerging Asia could account for more than half of all global consumption, or double their share in 2007.
All developing countries with geographic proximity to large consumer markets or with tradable service expertise stand to gain, from the Philippines to Morocco, Costa Rica, and India. Advanced economies with strong service sectors will also likely do well, as demand for services globally continues to rise. However, the dynamics for this new wave of globalisation are different, and the winners and losers may be different, too.
What is essential is to recognise that globalisation is morphing, shifting gears to be more data-driven and more focused on Asia as the new core. In its new guise, it can bring a myriad of benefits for those quick to embrace it. We have calculated that global flows of goods, services, people and data boost GDP globally by around 10 per cent over a decade, compared with a scenario in which these flows do not exist. Our surveys show that many executives are worried about the current uncertainty about trade policy and recent tariff increases.
But changing times also bring significant new opportunities, both from technological innovation, which can raise productivity and power new business models, and from the rise of cross-border services. Business leaders - and the politicians raising the stakes - need to look beyond the noise about trade and focus on the bigger trends that will shape the world economy over the next decade and more.
- The writer is managing partner and Asia chairman of McKinsey & Company