The changing face of global economic power

Dennis Morrison, Contributor

A notable consequence of the recession that is now ending is the acceleration in the pace of change of the economic geography of world power. China's displacement of Japan as the world's second largest economy is the most frequently mentioned shift in the ranking of economies and one that has given added force to negotiations for a reconfiguration of the governance structure of the International Monetary Fund (IMF). In coming months, this will be a subject for diplomatic bargaining between Europe, which is overrepresented in the IMF relative to the size of its economy, and on the other side, developing countries and the United States which are pressing for rebalancing.

More symbolic of the changing economic geography is, for example, China's ascendancy to top rank in the volume of domestic motor-vehicle sales. The automobile industry was, in the 20th century, a mark of industrial power in advancing economies in Europe and North America and then in Japan. In the United States, ownership of a motor car was a symbol of upward mobility and indispensable to the American lifestyle. With its giants General Motors, Ford, and Chrysler in the forefront, annual motor-vehicle sales were running in the order of 17 million units prior to the recession. But last year, US sales fell dramatically to only 10.4 million, and indications are that they will struggle to reach 12 million this year.

Meanwhile, the Chinese market is growing by leaps and bounds, and is likely to exceed 15 million units this year, propelled by that country's explosive economic growth. Sales in China, too, have been fuelled by the easing of credit under stimulus measures taken to counteract the global recession. With recent acquisitions of some Western brands and a burgeoning domestic market, China's motor industry can be expected to become a crucial component of its industrial machine.

Investment flows

The direction of investment flows is another indicator of how the economic landscape is shifting, and the recalibration of the global production system that is taking place. Not surprisingly, flows of foreign direct investment declined drastically in 2009 by 37 per cent, after a 16 per cent fall in 2008. But, in the process, the share of the flows to developing countries has risen to nearly 43 per cent, while that of developed economies was just over 50 per cent, coming from nearly 70 per cent five years ago.

As in other areas, China has leapfrogged several developed countries surpassing France and the United Kingdom, taking up second place after the United States in 2009. Against the trend of falling outward investment by the developed countries, China has also been expanding its investment abroad, especially in the search for mineral resources. This can be seen in several developing countries in Africa, South America, and Asia, and also in acquisitions of stakes in global industrial companies.

While China is the star performer among developing countries, it is important to note that half of the top six destinations for foreign direct investment in 2009 were developing or transition economies. Developed countries suffered the worst decline, with inflows falling by 44 per cent in 2009, while inflows to developing countries declined by 27 per cent. Since the dynamic economies in Asia and Brazil are playing a leading role in the recovery of the global economy, we can expect that inflows to and outflows from these regions will gather momentum.

Small island developing states were badly hit, with foreign direct investment declining by 35 per cent in 2009, but domestic investment in these economies fell even more dramatically. Jamaica, Trinidad and Tobago, and The Bahamas account for half of the inflows to this group, and the impact of the decline is seen in the downturn in these economies. Tourism is a major drawing card for foreign direct investment to these countries, and, therefore, recovery of inflows will depend on how quickly the sector rebounds. Inflows to tax havens like The Bahamas will, however, be limited by the stricter international regulations being instituted.

Dynamic rebound

The changes in the economic geography are also showing up in international tourism. Preliminary data from the World Tourism Organisation indicates that recovery in global tourism appears to be proceeding ahead of earlier projections, driven by "a very dynamic rebound" in the Asia-Pacific region in particular. This region was the first to recover after a severe contraction, and is now registering impressive growth in international arrivals, drawing on double-digit increases in visitors within the region.

In the first six months of 2010, tourist arrivals in the Asia-Pacific region increased by 14 per cent, as against seven per cent for total global arrivals. By comparison, the Americas grew at the world average of seven per cent, while Europe, the largest single region, managed an increase of only two per cent. On an overall basis, developing economies recorded increase in arrivals of eight per cent as against six per cent by advanced economies. This followed the situation last year when international tourist arrivals declined by 3.4 per cent in developing countries while falling by nearly five per cent in developed countries.

As the Asian economies continue to outpace recovery in Europe and North America, the tourist industry in the region is likely to sustain the fastest growth rates globally. Even with Europe's modest rates, that region, which now accounts for over 50 per cent of international arrivals, will remain the dominant force in global tourism.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.