Dawn of a new economic order? The Western dominance of the world's economy is being challenged by a small but powerful collection of emerging markets led by China, Brazil and India. The economic map of the world in 50 years' time, says our columnist, will be very different from what it is today.

While the countries which form the Organisation for Economic Co-operation and Development (OECD) have enjoyed virtually unchallenged control of the world's economy since the industrial revolutions of the 19th century, emerging markets are now beginning to challenge the status quo.

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The term 'emerging market' was first suggested in 1980 by the International Finance Corporation (IFC), the private sector arm of the World Bank, to describe developing economies with exceptional potential for rapid growth. Over the past two decades, most emerging markets have transformed their markets and improved their economic performance.

The Economist magazine estimates that the total output of emerging markets, led mainly by China and East Asia, now represents more than half of the world's gross domestic product (GDP). Lars Thunell, executive vice-president of IFC, is quoted as saying: "Emerging markets as a group have proved they can sustain high growth and attract capital. There is tremendous dynamism."

According to the International Institute of Finance, a US-based association of private banks, net private capital flows to developing economies last year reached a record $358bn, more than four times the amount of official development assistance.

"It is as sweet as it gets" for emerging markets, says the Wall Street bank Morgan Stanley, forecasting continued robust growth this year, up 6.6% and improving on the 6.4% recorded in 2005. Moreover, bullish sentiment prevails in the global capital markets, including among long-term private and institutional investors, for emerging markets. The US firm, Emerging Portfolio Fund Research, reckons that emerging market equity funds last year attracted $16.5bn, a fivefold increase on 2004 inflows.

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Encouragingly, South Africa's stock market was a lucrative destination for investors, attracting a record net R50.2bn ($7.96bn) of foreign portfolio investment in 2005. Earlier this year, global consulting firm Mercer conducted a survey of 157 fund managers with a total of $20 trillion under-management and found that the majority expected a 9% annual return from emerging markets to the 7.6% forecast for developed markets.

Strong indicators

The growing clout of developing economies is evident from trade and financial statistics. In 2005, the emerging markets' combined GDP rose (in current US dollar terms) by $1.6 trillion, outpacing the $1.4 trillion increase of advanced economies. Importantly, the expansion is global--in fact, China and India together accounted for just 20% of the total increase in emerging markets' GDP last year, with important contributions from the newly industrialised Asian economies (South Korea, Taiwan, Hong Kong and Singapore), Middle Eastern oil-exporters and Africa, which posted real GDP growth of 5%, according to the Paris-based OECD.

The emerging market's share of total merchandise exports has surged to 42%, from 20% in 1970, accounting for more than half of the growth in global exports between 2001-05. Thus, the advanced economies' trade with emerging markets is expanding twice as fast as their trade with one another.

Over 50% of the US, the eurozone and Japan's total exports are now made to developing countries. Meanwhile, the IMF's data shows that the combined current-account of all emerging markets shifted from a deficit of $88bn in 1996 to an estimated surplus of $410bn last year. Concurrently, many have accumulated huge foreign exchange reserves--emerging markets now hold about two-thirds of global forex reserves, while their average ratio of external debt to exports has declined from 174% in 1998 to 82% last year.

Three external factors, however, have helped to steer emerging markets on a higher growth path in recent years: export-led growth fuelled by strong US import demand, rising commodity prices (especially crude oil and metals) and low interest rates, particularly useful for South America, where the debt-to-export ratio exceeds the emerging markets' average.

Future growth will depend on whether this favourable environment continues in coming years. Rising US interest rates and high energy prices pose some downside risks in this regard.

The economic research division of US investment bank Goldman Sachs has published a fascinating piece of research, "Dreaming with BRICs: The Path to 2050", in which sophisticated forecasting models were used to project how the global economic landscape might look in 2025 and 2050.

The research suggests that the so-called BRIC countries (Brazil, Russia, India and China) will have boosted their capacity to become economic heavyweights on a level with industrialised countries by 2025. In fact, the big four could rank among the world's top six economies by the middle of the century.

Strategic importance

"The BRICs are a key aspect of the modern globalised era," say the Goldman Sachs' researchers, adding "what distinguishes these four countries from other emerging markets--beyond the bare fact of their potential market size--is their strategic importance to multinational companies and their centrality in the current wave of globalisation. They are unique in that regard."

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What makes the BRICs distinct is their growing ability to challenge the major economic powers (notably the US, Japan, Germany, Britain and France). The BRICs' impact has grown rapidly in the past decade. They contributed about 30% of world growth in US dollar terms between 2000-05, whilst their share of world trade has risen from 7% in 2001 to 15% in 2005.

The group is now running healthy current-account surpluses and, particularly in the case of China, has built up vast forex reserves. Estimates suggest that the BRICs hold more than one-third of global forex reserves, providing important funds for financing the US current-account deficit and thereby supporting the US dollar.

Furthermore, the BRICs' share of foreign direct investment (FDI)--both inward and outward--continues to increase year-on-year. Their combined share of FDI inflows and outflows stands at 15% and more than 3%, respectively, of the global total.

The transnational corporations from these countries are expanding overseas operations and mergers and acquisitions have also increased. For example, India's Vedanta Resources invested in a 51% stake of Zambia's Konkola Copper Mines in 2004 and the state-owned China National Petroleum Corporation is actively investing in African oil-producing countries, especially in Nigeria and Sudan.

The big four remain a key factor behind bullish commodity markets, reflecting a strong demand for energy and other natural resources. China has overtaken Japan as the second-largest oil importer after the US.

Overall, the BRICs account for one-fifth of global oil demand, while Brazil's agricultural sector and India's intellectual property sector have ensured that both their governments take a lead in the current tough negotiations taking place within the World Trade Organisation. The Group of 20 developing nations is led by the BRICs.

Goldman Sachs have also conducted an in-depth study to identify other emerging markets, the 'Next Eleven' (N-11) nations, which if given a supportive policy environment might achieve BRICs-style rapid growth in coming decades. The N-11 group consists of Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. Surprisingly, it excludes South Africa despite that country's compelling potential.

However, Goldman Sachs' researchers stress that N-11 capacity to become significant economic players is highly contingent on pro-growth policies being adopted. These include macroeconomic stability, sound political institutions, greater trade and investment openness and large investments in basic infrastructure as well as improved public services such as education and healthcare.

Of the 11, only Korea and Mexico appear serious candidates to "become as important globally as the BRICs", says Goldman Sachs. For Egypt, Nigeria and others to realise their optimal potential will require considerable work in fostering a conducive environment for private investment and foreign trade.

What is evolving for the second half of the 21st century could well be a new world order dominated by new economic powers, assuming the BRICs and others such as the N-11s fulfil their long-term potential.

Global leader

Based on Goldman Sachs' forecasts, China could become the world's biggest economy by 2040, followed by the US, India, Japan, Mexico and Russia. Resource-rich Nigeria, meanwhile, could well be the N-11 group's third-largest economy by 2050, behind Mexico and Indonesia but overtaking the likes of Korea and Italy.

In 2045, the combined projected GDP of BRICs ($69.34 trillion) will exceed a projected GDP figure ($57.92 trillion) for the Group of Seven (G-7) economies. Yet the picture in terms of GDP per capita (i.e., the overall indicator of living standards) is quite different. Even by 2050, the G-7 would still top the league table, although Korea's income per head would surpass each of the G-7, except the US.

History may be about to repeat itself because the world's developing economies were responsible for four-fifths of global output until 1820, according to the economic historian Angus Maddison. In fact, it has been noted that the BRICs economies share similarities with the US economy of about 50 years ago.