Rethinking Globalization: The Next Ten Years
Will slower globalization hamper global growth?
- Concerns about the impact of the global financial crisis on the long-term growth potential of many developing economies are over-done.
- The rotation in world trade from developed economies to developing economies has continued. Capital inflows to developing economies have also resumed, particularly to Asia.
- The latest data show that growth gaps between developed and developing economies remain as wide as they were prior to the global economic crisis.
The benefits of globalization for relative growth outcomes have been very one-sided in recent decades, and heavily skewed toward growth in Asia — especially China and to a lesser extent India.
Indeed, if one removes China and India from consideration, there has been very little improvement in the relative growth rate of developing economies compared with developed economies. And without Asia there has been hardly any improvement at all.
More recent years have seen a slightly greater capacity from other developing economies outside of Asia to "catch-up" with the developed economy bloc. Russia is perhaps the most notable example.
The relative shifts that have unfolded in more recent years, however, still remain heavily skewed toward Asia.
Factors that have been pivotal to globalization, such as a rising share of world trade and financial flows in global GDP, have suffered considerably during the crisis of the past 12 months.
Importantly, however, the rotation in world trade from developed economies to developing economies has continued. Capital inflows to developing economies have also resumed, particularly to Asia.
The near-term outlook for many developing economies (and, again, particularly in Asia) in the meantime remains relatively bright.
The latest data show that growth gaps between developed and developing economies remain as wide as they were prior to the crisis, in stark contrast to the U.S.-led recessions of the early 1990s and early 2000s.
Developing economies in Asia have been subject to surprising consensus forecasts on the upside, just as they did in the years leading up to the crisis. Policy responses to mitigate the economic impact remain accommodative. Finally, underlying domestic and external imbalances for most remain extremely modest.
Concerns about the impact of the global financial crisis on the long-term growth potential of many developing economies are over-done in our view.
Demographic factors, catch-up potential from initial underlying income levels, and low capital-to-labor ratios, together with domestic savings and investment rates, are more significant determinants of trend growth — more so than trade exposure to developed economies, for example.
Empirical analysis of growth drivers suggests that China and India will continue to enjoy relatively rapid GDP growth in the years ahead. Other economies that score favorably include Indonesia, Singapore, Thailand, Argentina, Mexico and Chile.
In our base case scenario — which assumes a slower pace of globalization — our model results suggest that global growth will average 3% over the next ten years.
This is more than one percentage point slower than average growth rates between 2003 and 2008, but only slightly slower than the average pace in the 20 years from 1988 to 2008. Advanced economies will register growth of less than 2%, but emerging economies will achieve growth of 5.5%.
In a risk case scenario of much reduced rates of globalization, these estimates are lower — particularly for developed economies, but less so for developing economies.
Global growth averages 2.8% in this scenario over the next ten years — with advanced economies posting growth of 1.5%, while developing economies achieve growth of 5.2%.
Editor’s Note: This feature is adapted from an August 14, 2009, UBS report entitled, “Will Slower Globalization Hamper Global Growth?"