By Tom Stevenson, investment commentator, Fidelity International.

After the Cold War ended with a victory for capitalism over communist ideologies, the US’ economic and military power was so dominant it became the world’s only superpower. That’s crumbling now as wealth and power shift from West to East.

As part of our series on “21st Century Investment Themes”, we look at how the emergence of a world where many states are equally powerful could be one of the great changes of this century.

It appears safe to forecast that by 2050, the world’s 10 biggest economies are likely to different from today. China, almost certainly, will be the world’s largest economy. India will not be far behind the US, while Brazil and Russia will supplant major Western European powers. It is clear already that gaps in national power are narrowing between developed and developing countries. 

One natural consequence of this is that emerging countries will consider alternative models of development. More countries may be attracted to China’s centrally driven economic model, especially in Africa where China is building ties.

Non-state entities are likely to become more influential. These include companies, especially ones with global brands. Political forums and trade organisations are likely to wield more influence in an interdependent world and help in negotiations between trading blocs.

While the move to a world with many important powerful states is relatively certain, there are uncertain outcomes that need to be addressed.

In a world where no superpower dominates, there is more potential for discord but also greater necessity for cooperation and technical progress to solve well-recognised problems. Economic and population growth will put pressure on energy (especially oil), food and water resources and raise the prospect of fights over access to resources. The US dollar’s position as global reserve currency could come under threat. 

When giants wake
The long-term view of the East’s ascension is compelling and is also supported by historical precedent. History not only shows us that power-shifts are nothing new. It can also tell us the conditions that typically accompany them.

In the 1500s and 1600s, China and India were responsible for huge chunks of the global economy and international trade. They then entered a period of isolation and self-sufficiency in the 1800s, so their resurgence is overdue. They are, after all, the two most populous nations on earth.

In the past 10 years, the rise of China and India and other emerging markets and the wealth shift from West to East have been extraordinary. The emerging countries posted current-account surpluses by exporting commodities and manufacturing good to the West and invested their foreign earnings in US financial assets. Over the same period, many Western countries recorded current-account deficits and became debtor nations.

The savings mismatch around the world was one cause of the recent global financial crisis that was the most damaging since the 1930s. More uniquely, it was the first widespread credit crisis centred in the West. Such crises used to happen in Russia, Latin America and Asia. Time will tell if the recent financial crisis is seen as when the centre of gravity in the global economy decisively shifted. What is certain is that it has clarified and accelerated a shift in investors’ minds.

Power rests with creditors
History shows that economic and geopolitical power tends to rest with the largest creditor nations – Spain in the 1500s thanks to a richness of South American gold; Holland in the 1600s due to its mercantile prowess; France in the 1700s because of its progress; the UK in the 1800s due to its industrialisation and imperialism and the US is the 1900s thanks to its economic drive. Asia regionally, and China specifically, will be the next names on that list.

With its US$2.4 trillion in foreign reserves, China has begun to wield its economic power in a political way, though not always successfully. Attempts to swing the negotiations at the Copenhagen climate change conference in its favour were thwarted by western nations. More recently, strong global brands such as Google have rebuffed China over alleged political interference.

For every prediction, there is a naysayer and for every projection there are myriad alternatives. Some commentators think the recent growth in emerging markets will falter.

It’s true that a decade of rapid growth in itself is not enough for the biggest emerging nations to take global economic leadership from the US and Western Europe. And, we may see bouts of volatility in emerging markets.

However, if things move towards the kind of global economy in 2050 that we envisage, then this historic shift in power could become the kind of epochal investment story that dwarfs even the recent heightened interest in emerging-market equities and debt.

To make a comment on this article, please click below. If you are a registered user of the Professional Planner website, please log in to the website before leaving your comment.

Join the discussion