Shifting
wealth: rising powers and the new world order (in 16 paragraphs)
1.
How
has the global development scene changed by the rising powers, or as we at the
OECD Development Centre call them, the convergers? It has diversified the pool
of actors, aid instruments, capital, trade and tax revenues to low-income
countries; it has allowed low-income countries to switch to the growth engine
that works; and it has loosened up the policy and paradigm monopole once solidly
occupied by the old donor cartel around Bretton Woods institutions and the DAC.
While overall it has been good news for poor countries, it has been rather bad news for aid
bureaucracies, for compliance with global soft law, and for donor (& NGO)
rethoric and posture.
2.
Strong shifts in net international
investment positions and sustained superior growth rates of large middle-income
countries are reshaping the world economy – a phenomenon the OECD Perspectives on Global Development
refer to and define as “Shifting Wealth”. The recalibration of the world
economy – Shifting Wealth – can be interpreted from a stock and from a flow
perspective.
3. The stock perspective: The global current account imbalances of the past decade – which to a large extent reflected a high external US saving deficit financed increasingly by China and oil exporters - have given rise to a significant shift in wealth distribution toward surplus countries linked to fossil-fuel production or high savings and exports. Rich OECD countries are being financed by countries which until recently played no substantial role as international investors. The United States is now the world’s biggest debtor. Joint with Japan, China has extended its position most as the world’s international net creditor.
3. The stock perspective: The global current account imbalances of the past decade – which to a large extent reflected a high external US saving deficit financed increasingly by China and oil exporters - have given rise to a significant shift in wealth distribution toward surplus countries linked to fossil-fuel production or high savings and exports. Rich OECD countries are being financed by countries which until recently played no substantial role as international investors. The United States is now the world’s biggest debtor. Joint with Japan, China has extended its position most as the world’s international net creditor.
4.
As
long as the rising powers remain ‘immature creditors’, they retain a strong contingent
currency risk incentive to switch from acquiring foreign financial to
buying foreign real assets. Investment vehicles such as sovereign wealth funds that
mostly (with the notable exception of Norway) originate in emerging countries
have grown in asset size and prominence. Western debt relief has given
way to Eastern export credits. The switch from Western to East and Southern
sources of finance translates into a higher share of state-sponsored capital
supply as opposed to pure private-sector sources. Many
newly cash-rich countries have different political regimes from the countries
that previously dominated international investment.
5.
The flow perspective:
Sustained growth that large emerging countries have experienced over the
last decade have conferred them a considerable growth advantage over OECD
average. The world has seen a switch in the engines of growth, since the late
1990s with a continued rise of global growth being driven from outside the OECD
area. Combined with very large populations, these growth differences translate
into a new world economy. From 2015, we project the non-OECD economies to
exceed the OECD area in terms of PPP-adjusted GDP. The world’s economic mass –
production, consumption, wealth – is moving East toward India and China,
realigning with the world’s demographic mass.
6.
Apart
from falling trade cost and expanding global production networks that are
driving global trade, the greater role of emerging countries has induced a much
finer degree of international specialisation than occurred previously when
North-North trade predominated. Global trade has witnessed the return of comparative advantage in
connection with Shifting Wealth. Foreign direct investment (FDI) has been a
crucial vehicle in building global production chains and has been usually
characterised by a predominant North-South direction, which is slowly changing
direction South-South and South-North.
7.
Apart
from the stock and flow definitions of Shifting Wealth, its geopolitical dimensions have moved very
much into the forefront. The substitution of the G8 for the G20 as the premier global economic policy forum,
the gradual rise in inclusion, representation and voice in international
organisations such as the Bretton Woods institutions and higher political
‘power’ in particular of the BRICS are noted features of their shifting
geopolitical stance on a global scale. However, the majority of smaller
emerging countries (Colombia, Egypt, Thailand, e.g.) still submit to the Pax Americana[1],
as is for example visible in the ca 60 countries that engage with the OECD in
one way or other. And within the BRIC group, there are considerable economic
and geopolitical divergences, with China the only true superpower.
8.
For
international monetary governance, the prospect of the renminbi and perhaps
other emerging-country currencies entering reserve-currency functions aside key
OECD currencies has gained momentum. In
global trade policy, Shifting Wealth translates into higher retaliation and bargaining
power for the rising powers. Finally, the growing importance of non-OECD
countries may translate into acceptance of a different
intellectual paradigm underlying cross border collective arrangements and lower
effective compliance of standards and best practices defined and scripted by
the advanced economies, not least in the global aid architecture. Building a Global Partnership for Effective Development
Cooperation has been agreed at the High-Level Forum on Aid
Effectiveness, in which governments of many emerging countries signed as donors
for the first time. Note
that China, India and Brazil only signed as ODA recipients as they do not
accept Paris Aid Effectiveness principles to apply to South-South cooperation.
9.
Despite
many assertions to the contrary, the positive growth performance of low- and
middle-income countries can be explained to a large extent by China’s growth;
in other words, emerging-country growth
has been endogenous to China’s growth to a certain extent. We (2012)[2] have produce findings that do indeed suggest
that poor countries, oil and non-oil, have been changing their growth
locomotive during the 2000s, from the G7 countries to China. To be sure, GDP growth in itself is not of much
help if it fails to bring down poverty . The
number of people living on less than 2$/day/capita started only to decline from
the 2000s, in the era of Shifting Wealth.
During the period 1981 and 2008, the number of people living in extreme
poverty (1.25$/day))decline by 650
million people to 1.29 billion, despite a rise in world population by more than
2 billion people over the three decades. Most of that global poverty reduction
occurred in China where the number of extreme poor melted down by half a
billion. But even correcting for China, the eradication of extreme (and less
extreme) poverty has gathered speed during the last decade.
12. How
then can we envisage cooperation between
traditional and emerging donors going forward? Before I turn to that difficult
issue, let me first quote the DAC Outreach Strategy 2008, in oder to understand
how NOT to envisage that cooperation: “Outreach constitutes
an essential element of the work of the DAC ... Enhanced Engagement aims to bring partners closer to
the OECD and what it stands for by engaging them closely in OECD processes
while supporting their own reform processes through the adoption of OECD
practices, policies, guidelines or instruments.‟ Many representatives of Western donor agencies (and
industry lobbies) seem to think that a new world order can be fundamentally
addressed by including China and other rising powers in existing arrangements
that the advanced countries have built since the Second World War. The
semantic corollary of such thinking is reflected in the term ‘outreach’ for a
while employed by the West when trying to establish a dialogue with the new
donors. It was assumed that the new Eastern donors could be assimilated to
Western-built international soft law.
13. The world is perhaps more likely to become bipolar rather than multipolar. I personally think that the US might be
the big stumbling block for cooperation between donors old and new. Hillary Clinton’s warnings on China in Africa[6] as representing the “new colonialism”, or the US push
for the Trans-Pacific Partnership Agreement (TPPA) to
counteract China’s ascendancy through US “economic and military statecraft”[7] in the Pacific support my fears that the US
will find it difficult to engage the rising powers in a constructive way. The main
geopolitical fault line in the next few decades will be the West and China. Imposing our norms and standards is a
non-starter simply as China, India, even Brazil will not accept standards that
the West has developed over decades. In a world of increasing competition for exhaustable resources and in a world of inexhaustable
protectionism, Policy Coherence for Development (PCD) will have a tough
life. The current bureaucratic struggle
between aid agencies – using PCD to escape their narrow aid focus through
getting a voice in other cabinet issues such as education, food, trade or
energy - and those who want to
mainstream development through outsourcing traditional aid items to education,
trade and other ministries may turn out to be quite pointless in the era of
Shifting Wealth[8].
14. True, global
soft law offers more effective ways of dealing with situations of
uncertainty and diversity where hard law would fail. Soft
law is easier to achieve than hard law, less expensive and more flexible,
especially when actors are jealous of their autonomy.
The OECD and other international
organisations have developed mechanisms to raise the compliance with soft law, the major instrument being the peer
review. Under what conditions can peer review and peer pressure work in
terms of bringing about compliance with a given set of standards? Factors
influencing the effectiveness of peer review: value sharing; adequate commitment;
mutual trust; credibility; and thightness
of policing a soft-law instruments[9]. While
a richer China, it is hoped, might move closer to our values, this is not a
foregone conclusion. The distribution fight for nonrenewable resources acts to
limit adequate commitment for effective peer reviews. And mutual trust, as seen
from the Chinese perspective, has suffered not risen over the past years.
15. In practice, peer reviews have often led to rather weak and incomplete compliance. DAC peer reviews are
not excluded from this criticism. Shortcomings of peer reviews also become
apparent in other organisations. The failure
of IMF surveillance with respect to the US financial system in the run-up
to the 2007-2009 global crisis, for instance, may point to another requirement
for soft-law effectiveness: limits on the degree of political influence,
especially with superpowers. Bear in mind, though, that a new world order is
still likely to resort to soft law and peer reviews precisely because harder
global laws and more effective
enforcement mechanisms would not be accepted.
16. Western soft law and its edifice of standards, best practices, norms and policy ‘insights’ built up over the past 50 years was essentially formed in a market economy and in a decentralised and unauthoritarian setting. The recent Western history of development is quite different from the policy lessons and paradigms of the rising powers and low-income countries. For example, China’s practice of packaged cooperation deals in which aid cannot be isolated and computed with any precision makes transparency hard to establish; the components of the package are not individually priced and it is difficult to separate aid from economic cooperation in general. The transparency issue must be dealt with in more intelligent ways than just asking China to become a member of a joint transparency initiative as postulated by the G8 in the past. A genuine synthesis of approaches of packaged cooperation that the recipient countries can compare based on hard empirical evidence and social-economic cost-benefit analysis, as opposed to the inclusion of rising powers into existing fragmented Western approaches, is required but will imply hugh changes in the behaviour of DAC actors. Are they ready?
16. Western soft law and its edifice of standards, best practices, norms and policy ‘insights’ built up over the past 50 years was essentially formed in a market economy and in a decentralised and unauthoritarian setting. The recent Western history of development is quite different from the policy lessons and paradigms of the rising powers and low-income countries. For example, China’s practice of packaged cooperation deals in which aid cannot be isolated and computed with any precision makes transparency hard to establish; the components of the package are not individually priced and it is difficult to separate aid from economic cooperation in general. The transparency issue must be dealt with in more intelligent ways than just asking China to become a member of a joint transparency initiative as postulated by the G8 in the past. A genuine synthesis of approaches of packaged cooperation that the recipient countries can compare based on hard empirical evidence and social-economic cost-benefit analysis, as opposed to the inclusion of rising powers into existing fragmented Western approaches, is required but will imply hugh changes in the behaviour of DAC actors. Are they ready?
[1]
See Thomas Fues, “Multilateral politics: At a crossroads”, D+C, No 53 (7-8), 2012, on who signed DAC agreements and
who didn’t at the Busan conference .
[2] Garroway, Chris, Burcu Hacibedel, Helmut Reisen and Edouard
Turkisch (2012), “The
Renminbi and Poor-Country Growth”, The
World Economy, 35.3, 273-294.
[3] See, e.g., Mwase, Nkunde, and Yongzheng Yang (2012), “BRICs’Philosophies
for Development Financing and their Implications for LICs”, IMF Working Paper 12/74, March.
[4] Kharas, Homi, and Andrew Rogerson (2012), Horizon 2025: Creative Destruction in the Aid Industry, ODI, July.
[5] Dahman Saidi, Myriam and Christina Wolf (2011), “Recalibrating
Development Cooperation: How Can African Countries Benefit from Emerging Partners?”,
OECD Development Centre Working Paper No. 302, July.
[6] Reisen, Helmut (2011), “China,
Zambia and theworldofhillaryclinton.com”, shiftingwealth.blogspot.com, 19.
June.,
[7] Clinton, Hillary (2011), “America’s Pacific Century”, Foreign Policy, November. For a geopolitical
analysis of the TPPA, see Kelsey, Jane (2011), “The TPPA as a
Lynchpin of the US Anti-China Strategy”, scoop, 21
November: “China will be increasingly isolated, as a critical mass of APEC
countries signs on to the “gold standard” deal, and may ultimately subordinate
itself to the TPPA’s US-designed “international norms”.
[8] Humphrey, John (2011), “European
Development Cooperation to 2020: Rising Powers and New Global Challenges”,
EDC 2020.
[9] Paulo, Sebastian, and Helmut Reisen (2010), “Eastern
Donors and Western Soft Law: Towards a CAC Donor Peer review of China and
India?”, Development Policy Review,
28.5., 535-552.