A year when the old world order draws nearer

What was the most significant geo-political event of 2014? It depends on your perspective. The return of American military intervention in the Middle East – including strikes against jihadist insurgents in Iraq, with US and Iranian planes sharing the same airspace – was an important moment. Washington also intervened in Syria’s messy civil war in 2014, an on-going four-year conflict that has so far cost an estimated 250,000 lives.

Those focussed on domestic issues may rightly regard the vote against Scottish independence, the preservation of our now 308-year-old United Kingdom, as the most important event of last year – even if, as seems increasingly likely, we’ll face another independence referendum relatively soon.

Both the ousting of Ukraine’s President Yanukovich last February and Russia’s subsequent annexation of Crimea are up there among the major international developments of the last twelve months. Certainly, the geo-political aftershocks of both moves could be with us for years to come.

As an economics nerd, though, and someone who has long studied the emerging markets of the East, I’ll remember last year for the passing of an important statistical milestone. For it was in 2014 that China overtook the US to become the biggest economy on earth.

In 1980, China’s annual economic output was just one tenth that of America. As recently as 2004, the Chinese economy was still only half that of the US. Back in October, though, the International Monetary Fund quietly published estimates showing China’s annual GDP at $17,600bn, compared to $17,400bn in the States.

The US remains far richer per head than China, with the average American commanding an income four times that of their Chinese counterpart. These IMF estimates are also on a purchasing power parity basis, including cross-border variations in living costs. Yet despite those qualifications, last October’s IMF estimates are hugely symbolic. America had been the world’s largest economy since 1872, when it overtook Britain. Now the US no longer holds an unequivocal claim to top-spot.

China’s catch-up over the last 30 years has been remarkable. Since the early 1980s, average GDP growth has been 9.8pc, compared to 2.7pc in the US. Beijing has achieved this performance not by following “the Western model” of capitalism and liberal democracy, of course, but by combining aspects of our market mechanism with state economic control and a distinct lack of national democracy.

This success, particularly in recent years as the West has struggled in the aftermath of the sub-prime debacle, has re-written the geopolitical map. Across Asia, Africa and Latin America, countries that might once have openly aspired to become Western-style societies are increasingly impressed by “the Chinese model”. This is unfortunate. I’m less concerned, though, by our lack of intellectual and cultural hegemony than I am about the prospect of East-West conflict.

The emerging markets clearly enter 2015 in worse economic shape than they’ve been for some time. China is expected to grow 7.3pc this year, down from 7.5pc in 2014. While this is still very fast, Beijing is grappling with a sagging property market, unsteady exports and cooling domestic investment. With the latest data showing factory output contracting year-on-year, 2015 growth could fall below 7pc.

Brazil could meanwhile enter recession this year and, among the other big emerging markets, Russia could contract by up to 3pc. Like all big commodity exporters, Russia will lose out if oil prices stay relatively low, with Western energy importers like the US and UK likely to benefit.

Having said that, while the developed economies are set to grow by 2.4pc on average in 2015, according to a new HSBC report, the emerging markets are on course to expand by 4.1pc. More importantly, Western growth is still far too heavily dependent on rising indebtedness, virtually-printed money and hype. Many of the large emerging continues, in contrast, continue to ride a mega trend of rapid-industrialization, urbanization and population growth the likes of which the West hasn’t seen for generations. With their volatile equity prices and sharp downturns, such countries look scary to many outside investors. Yet, in terms of long-term growth prospects, they remain far more attractive than the over-valued markets of Europe and the US.

While I’d like to see liberal democracy everywhere, I’m less worried about non-Western nations not following precisely in our footsteps – it was always naïve and historically illiterate to assume they would – than I am about growing signs of systemic disputes. For the emerging markets, while diverse and with rivalries of their own, share an extremely powerful joint economic and emotional interest in showing that the West can no longer assume to run the world.

Such nations now account for over half of global GDP, three-quarters of foreign exchange reserves and four-fifths of humanity. Their economies, while very far from perfect, have long been much faster-growing, more dynamic and far less indebted than our own. While we constantly tell ourselves they are vulnerable and we are strong, the emerging markets are actually better placed, in an increasingly unstable world, to endure global financial shocks.

It is unwise for Western governments so often to snub such countries, printing money like crazy to impose self-serving currency depreciations, while excluding them from the higher-echelons of supranational institutions likes the International Monetary Fund. We scoff when Brazil, Russia, India and China – countries with a total GDP now nine-tenths that of the US and EU combined – set up their own development bank, as they did in 2014. But these countries will run the global economy inhabited by our children and grandchildren. We need access to their fast-growing markets far more than they need access of ours. A little less hubris and a lot more understanding and acknowledgement of the shifting shape of the global economy would go a long way in keeping trade routes open and conflict in check.

Last year marked the 25th anniversary of the fall of the Berlin Wall. Back then, the “End of History” West-is-best thesis promoted by US academic Francis Fukuyama was just about forgivable, given the early flush of our Cold War victory. A quarter of a century on, its enduring influence amounts to dangerous delusion.

We enter 2015 with global trade talks in tatters, on the brink of the first failure of a multi-lateral trade negotiation since the 1930s. The World Trade Organization, by far the most important of the post-war multilateral organizations, built from the ashes of World War Two, is dying in front of our eyes. Resources conflicts are now also on the increase, with Opec openly defying the West, responding to increased US oil production by holding down prices to squeeze high-cost producers in a bid to knock out new Western capacity.

East-West relations are currently at their lowest ebb for many years, and the signs are that conflict is growing, rather than being resolved. Yes, Britain and the US are deeply frustrated with Russian intransigence. But China, India and much of the rest of the non-Western world are largely unimpressed by our narrative, remaining more than willing to do business with Moscow, ostensibly increasing rather than reducing co-operation with Russia in response to Western sanctions.

It is less important that the rest of the world resembles us and follows the same path of history we did, building societies we perceive to be in our image, than we continue to trade, do business and live together in peace. The West’s apparent hegemony, after all, is the exception rather than the rule. China has actually been the world’s largest economy for most of the last 1000 years. And now, after a couple of centuries of European and then American dominance, the East – whether we like it or not – is set to dominate global commerce once more.

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