The West’s political and financial elite is still a very long way from grasping the extent to which the global centre of economic gravity is now shifting – and the implications in terms of relative and absolute living standards.
On Friday, at its latest summit in Washington, the G20 group of nations countries issued a communiqué. I don’t know why anyone bothered. The document was meaningless.
The G20’s membership in theory includes the biggest Western economies, plus the most commercially important emerging markets. At the 2009 Pittsburgh summit, this grouping dubbed itself “the world’s premier forum for international economic co-operation”.
The global economy hasn’t yet fully emerged from the “sub-prime” fiasco. The Doha trade talks are disgracefully stalled. Western banks remain riddled with massive liabilities that haven’t been “fessed-up” – an inconvenient truth that could yet cause another “Lehman-moment” on skittish global equity markets. Several of the world’s “advanced economies” are anyway in intensive care, their sovereign debt markets propped-up only by “printed money”.
Faced with such vast challenges, and the dangers they pose for the future prosperity and security of the human race, the G20 came up with no specifics. The communiqué managed only vague promises about member states “aiming to promote external sustainability” and “pursuing the full range of policies required to reduce excessive imbalances”. As I said, I don’t know why anyone bothered.
The G20 is clearly failing as an effective decision-making body. Its member states disagree entirely about the reasons behind recent global financial instability, so have no shared analysis regarding what to do. The big emerging markets, in particular, are furious that the US seeks to wield the dollar’s reserve currency status as a “weapon”, using so-called “quantitative easing” to export inflation and debase the value of America’s debts to the rest of the world. The “emerging giants” also complain that, while broader than the G7, the G20 is still run by Western powers essentially to promote their own interests.
No surprise, then, that the fast-growing economies of the non-Western world are establishing rival summits. This latest G20 gabfest was over-shadowed by a simultaneous gathering on the Chinese island of Hainan, attended by the leaders of Brazil, Russia, India and China – the so-called BRIC group.
China is the world’s second biggest economy. India, Russia and Brazil are all well inside the top ten. By 2016, the International Monetary Fund predicts, the GDP of these four will total $21,000bn, out-stripping the US. Already, on a currency adjusted basis, the BRICs are bigger than the US and UK combined.
It is almost an economic cliché to highlight the growing commercial prowess of these new economic upstarts. The truth is, though, that the West’s political and financial elite is still a very long way from grasping the extent to which the global centre of economic gravity is now shifting – and the implications in terms of relative and absolute living standards.
The BRICs account for 45pc of the world’s population and around three-quarters of total currency reserves. They have few serious fiscal issues and all are net external creditors. The emerging markets in general, says the IMF, will grow by an annual average of 6.5pc over the next four years, while the big Western economies will expand by only 2pc. The BRICs, and their smaller cousins, are now the driving force of the global economy.
Some say the BRIC group makes no sense. Russia and Brazil are big commodity exporters, for instance, while China and India are major importers of such goods. Yet all four nations share a common cause, being united in their determination to convert their new economic power into international political clout – a determination fuelled by their West’s continued dominance of the IMF, the World Trade Organization and other global regulatory bodies.
A key topic at the Hainan summit was the dollar’s reserve currency status. The importance of the greenback’s predominance in global trade cannot be over-stated. Being reserve currency allows the dollar to defy gravity even though the US keeps borrowing and expanding its money supply. So America is acutely sensitive to any signs such reserve status is slipping.
As such, it is interesting the BRICs just signed an agreement to grant one another loans in their national currencies, not in dollars. The mighty Chinese Development Bank has now formally offered 10bn yuan loans to other BRIC members, expected to focus on large oil and gas projects.
Russia and China are now trading oil in rubles, rather than dollars. A Sino-Russia oil pipeline recently opened, almost ignored by the Western media, which will eventually pump 1bn barrels a year from Siberia to the People’s Republic. It will soon be joined by a gas pipeline too. These developments undermine the dollar’s role of global petro-currency, the bedrock of its reserve currency status. They are of huge geostrategic importance.
The BRICs are all creditors to the US – with the Chinese, in particular, holding vast swathes of American Treasury bills. So they won’t make any sudden moves in terms of dislodging the dollar as “top-dog”, as that would harm the value of their T-bill holdings. They are, though, pushing for the IMF to overhaul the role of Special Drawing Rights, the international unit of account comprising the dollar, euro, yen and sterling.
Were the yuan and possibly the ruble to be included, the BRICs say, then the SDR could ultimately replace the dollar. That would be anathema to Washington, formally ending America’s global hegemony and forcing it to address its massive overseas debts. It was a message the BRICs wanted to emphasize in Hainan, just in time for this weekend’s Spring meetings of the World Bank and the IMF in Washington.
South Africa attended this latest BRIC conference, representing the entire African continent. To moan about political posturing is to miss an important economic point. Business between Africa and the BRICs is booming. Sino-African trade alone has risen from $10bn in 2000 to $129bn last year. Other emerging markets have noticed that Africa, despite political and logistic difficulties, is on an economic roll.
The GDP of Africa, the world’s second most populous continent, grew by more than that of India back in 2008. Africa is likely to repeat the same trick this year. That’s why the BRICs are investing heavily – both financially and politically – in the world’s last commercial frontier.
In his recent book, “The Curse of Berlin”, Nigerian academic Adekeye Adebajo comments that the partition of Africa by white colonialists in the mid-1880s produced “some of the most vulnerable societies in modern history”.
He states that while “Africa’s post-independence leaders have largely lacked the vision and resources, and sometimes the ingenuity and discipline to reverse this legacy”, the impact of the West’s presence “has distorted African politics and society and retarded socio-economic development”.
The growing BRIC presence in Africa, particularly that of the resource-hungry Chinese, is seen differently says Adebajo. For one thing, “China, unlike the West, is investing heavily in the infrastructure sectors – roads, railways, electricity – that Africa needs for its industrial take-off”.
At a deeper level, Adebajo notes that “the one big advantage China has over its Western rivals is that most African leaders don’t perceive it to be a neo-imperial power”.
There is a message here that the West would do well to heed – not just in Africa, but in all our dealings with large emerging markets. We have no God-given right to be in charge. We should stop acting as if we do. This is not a moral imperative, but a statement of the bald economic facts. The longer we ignore these realities, the tougher it will ultimately be for us to cope in the new world order now so rapidly emerging.
Liam Halligan is Chief Economist at Prosperity Capital Management
This article first appeared in The Sunday Telegraph: