Shift to developing world happening

Evidence is mounting that the weight of international economic dominance over the next few decades will be shifting away from the US and Europe towards the developing world as China makes an offer to buy some of Greece’s sovereign debt and provide a $5 billion credit facility.

Over the next four decades the scales of economic dominance will swing towards China, India and Africa and these regions will deliver one of the biggest shifts in the world economy, Prof Nick Benedell of the Gordon Institute of Business Science (Gibs) said in Johannesburg last week.

Addressing the Chartered Financial Analyst South Africa conference he said a fundamental restructuring of the world economy is taking place. While Europe and North America are the centre of the world economy at present, delivering 70% of global GDP, the shift will see them being pushed to the fringes by the developments in Africa, China and India. South America will join this grouping later.

The economies in these countries are small  but growing fast while in the developed world the economies are, at best ,weak – a tendency he foresee will continue. The impact of the financial crisis on the developing world was also considerably less than on the developed economies -- and the developing economies also recovered more quickly.

Meanwhile Gibs finance and economics professor Adrian Saville said that it was “mathematically impossible” for some of the world’s developed economies not to default on their debt.

Saville, who is also chief investment officer of Cannon Asset Managers, said the extreme government debt levels of advanced Western economies and Japan made a sovereign default a certainty. “If governments don’t default outright, they will find a polite way to default. And that simply means printing more and more money. But make no mistake; it is still effectively a default. Many developed countries are in real financial trouble.”

Looking at debt-to-government revenue ratios the duress which countries such as Japan, the US, Greece and Italy are under becomes clear, he argues and says they are so strapped for money that they owe many multiples of the revenue they collect.

“Interestingly, measured by the debt-to-government revenue metric, the US is more stretched than troubled Greece.

Nobel prize-winning economist Joseph Stiglitz also warned last week  that the future of the euro is looking bleak and that the fragile European economic recovery could be irreparably damaged by a wave of austerity measures sweeping the continent.

He also warned that the banking sector, where the financial crisis originated two years ago, has gone back to business as usual too quickly and that there are still risks of another financial crisis despite some improvements in regulation.

In an update of his book Freefall, which was published only eight months ago, Stiglitz expresses fear that governments around the world will attempt to cut their deficits too quickly and risk a double dip recession, reports the UK’s Daily Telegraph.

The International Monetary Fund in its latest World Economic Outlook published last week predicts that the global economy will expand by 4.8% in 2010 and by 4.2% in 2011 overall. For the advanced economies the prediction, however, is 2.7% and 2.2% for the two years respectively while the prediction for the developing and emerging economies is 7.1% and 6.4%.

While the economic recovery for many advanced economies would remain fragile until improving business conditions could lead to the creation of higher employment, the picture looks different in emerging economies. There household spending is expanding, while investment is leading to higher employment.

Amid a recovery in exports and commodity prices, combined with robust domestic demand, sub-Saharan African countries were expected to grow their GDP by 5% this year and by 5.5% in 2011.

Evaluating the Chinese offer

Against this broad global picture it is worth looking at the Chinese offer to Greece in a little more detail.

The offer was made during a two-day visit to Greece over the weekend before last by Chinese prime minister Wen Jiabao as his first stop on a European tour.  He also promised that China would double its trade ties with Greece over the next five years, underscoring what many observers see as Beijing’s willingness to use its economic strength to win friends.

The deal is about much more than just buying some of Greece’s sovereign debt and the $5 billion credit facility will largely go towards enabling Greek shipping companies to buy Chinese-built ships.

While Greece has the largest merchant shipping fleet in the world and some 50% of Chinese merchandise is transported in Greek ships, the deal is more about China expanding its presence in the Greek shipping industry than anything else.

China’s Ocean Shipping Company (Cosco), its largest shipping and logistics company, has in fact been hard at work over the past two years expanding its activities at some Greek ports.

At the same time the Greek deal and conciliatory tone towards Europe, with whom Jiabao said his country “is prepared to go hand in hand with the EU as passengers in the same boat, to strengthen cooperation … to confront the financial crisis,” served to deflect attention away fromthe fact that China is at loggerheads with the US over the strength of the yuan.

While similar scenarios are unfolding on many fronts in many parts of the world, it is clear that the world is heading for a new normal in terms of economic muscle post the present international economic turmoil.