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What does a multipolar world mean? Brian Easton urges the need to establish a framework to guide New Zealand in the developing new order in the decade ahead.

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Last year was a period of economic re-stabilisation after the global financial crisis which began in 2008, although there were clear signs of its onset in 2007 and even 2006. It would be easy to think that the world has got through this pretty unscathed--unless you became unemployed or lost a large chunk of your wealth--but there is much yet to work its way through. Far too many countries are currently depending on the public sector to sustain economic activity; that means their public debt is growing rapidly. Getting the balance right is going to be hard enough, but there is a danger of sovereign debt crises in a second phase global financial crisis following the first phase crisis involving financial corporations.

Underneath is the need to change the framework of managing the financial system, although it is unclear what the new paradigm will be or what economic theory will underpin it. Undoubtedly the change is going to be bitterly fought over.

These are matters which will, one way or another, be revisited over the next few years. In this article I will address an even greater transformation of the world economy, one which has been evident for ten or more years, and which was prominent last year. Even so it is difficult to get our heads around it. The world economic order is changing.

Late last year, at the BRIC seminar, I talked of how 250 years ago manufacturing was located where the population was, but how the falling costs of distance and economies of scale meant that during the 19th century manufacturing became concentrated in the North Atlantic economies. (1) In the 20th century Japan joined them, but manufacturing still remained concentrated in a handful of countries.

Towards the end of the 20th century, there was a change to that pattern, one which is predicted by the same economic models that explain the concentration. Manufacturing began to move to the poor and middle income countries of East Asia, while the rich economies de-industrialised. Manufacturing has been moving back to its 18th century pattern of location with population. And since the bulk of the world's population is in China and India, that is where factory production is moving to, although perhaps we should not get too hung up on sovereign boundaries and see the growth in the entirety of East and South Asia.

This is not bad news for New Zealand. Their growing affluence generates a demand for food, while the factory labour leaving the farms reduces their not very effective means of supplying food. Economies like New Zealand's fill the gap--already 40 per cent of our milk powder goes to China. Food prices will rise, while the price of manufactures fall. Were our terms of trade at the level they were in the early 1960s, the value of exports would be about 10 per cent higher, and there would be no current account deficit--assuming production and expenditure patterns remained the same. Of course, they would not; it would be quite a different economy, possibly richer than Australia's, although there are so many assumptions here, who knows? Even so, we are likely to have a quite different economic direction from that which we have been thinking about for the last half century. Again, this is a matter for another discussion--for many more discussions--for we shall have to break out from our thinking of the past.

Hegemonic order

The same problem applies to the world economic order. We are used to an order in which there is a hegemon, a dominant economy which regulates the world economy just as a monopolist regulates its market. When distance was expensive, the hegemon may have been the local baron or even a tiny empire such as the Roman one. In the globalised world of the last two centuries there was a global hegemon; first it was Britain, then America with an uneasy--and at the time not understood--transition between the First and Second World Wars.

So we think of a hegemon as an integral part of the globalised world. Much popular American debate sees its hegemony being threatened by an alternative; currently it is China, but Russia, Japan and Europe have all been considered in recent years.

However, while American economic power may be growing in absolute terms, it is weakening in relative terms. Its share of the world economy is diminishing, Europe is getting itself sorted out--we may see the euro as a genuine alternative to the US dollar--China is growing rapidly and the likelihood is that India will too.

There are plenty of indications that this loss of hegemonic power is well under way, including the inability to settle the Doha Round or to get an accord at Copenhagen. Once the US dominance--perhaps with a bit of European support--would have coerced everyone into some sort of reluctant agreement. Now it is 'no deal'.

Yet it is unlikely that there will be a hegemon to replace America in the evolving world order. Rather there may be, say, five economies all of which have sufficient power to be able to influence the other four, but not sufficient to dominate them or the rest of the world. The five in size of their current production (valued at common purchasing power prices) are the European Union, the United States, China, Japan and India. Additionally there will some other countries which may be able to play larger than regional roles: because of its nuclear weapons and energy resources Russia may be able to punch above its economic weight; Brazil is also frequently mentioned.

Multipolar world

A multipolar world of five super-powers is difficult to think about systematically. Economists know this because while economics markets are easier to analyse than political markets, we have no comprehensive analysis of a market with five major players.

I illustrate this with both a popular and a sophisticated example. For a popular case consider the average American who is going to find it very hard to understand the consequences of America's relative economic power diminishing. It was hard enough for the British to understand their loss of hegemony, and theirs was the simpler case of it being transferred elsewhere.

It is easy to simplify the issue into China challenging the United States, but its economy produces about half that of the American economy (which itself is smaller than the European economy on most comparisons). Certainly China's offshore savings give it an additional leverage; last year we saw America showing deference to China. In 2008 some of the US financial rescues seem to have been moderated by the need to recognise the Chinese interests.

But financial reserves are not permanent. China has major internal challenges of a restless middle class and environmental degradation; they can be mollified to some degree by spending the surpluses. Meanwhile its exports will reach full market penetration, and its economic growth slow down. (Recall the British economy cannibalised its financial strength to fight the First and Second World Wars. The United States has done much the same in the last decade fighting in Afghanistan and Iraq.)

The danger is that an uncomprehending American public, failing to understand the transformation, thinking the United States is more powerful than it is, may set up a political momentum which leads to the American government lashing out--as it did over Iraq--and weakening the US economy in the medium run.

Evolving order

Their response is not going to be helpful to the development of the evolving world order. In the past its culture has been dominated by the European tradition. Three of the five big players do not have Graeco-Christian foundations. They will bring their cultural baggage to the evolving order--just as Maori have not simply adopted Pakeha practices but added their own.

What about a more sophisticated response? First I sketch one for New Zealand.

When one looks at a multipolar world it is difficult to see how New Zealand fits in. We do not belong to any significant region (although we do have responsibilities in the South Pacific). We, of course, have an important relationship with Australia, but it is hardly a major player itself (being just over 1 per cent of the world economy) and it has regional concerns of no direct interest to us (as in the Indian Ocean).

In the past we have tucked in behind the hegemon, playing our supportive part. What if there is no dominant economy? We face two ways. Our heritage and our heart is with America and Europe but trade is tugging us towards Asia.

Early recognition

An interesting response was that New Zealand was the first country to acknowledge that China was a market economy for WTO purposes. That decision contributed to the early free-trade agreement, and all those milk powder sales to China. We could have waited and joined the pack, but instead we ran an independent course without being unmindful of our allies' interests.

We cannot exactly repeat that strategy with, say, India, and in any case in my view multilateral free trade agreements are to be preferred over bilateral deals for small countries (with plurilaterals as second bests).

These ponderings have focused entirely on economic and commercial issues. I have hardly mentioned international energy and environmental issues while diplomacy adds further dimensions, which adds to the complexities. (Migration is another global issue.) We are not going to find a solution overnight. But a review of last year and the entire decade reminds us that while we may have incremental responses to the particularities we need a framework to guide us. The last decade indicates that the framework of the past is not going to be appropriate for the future.

That conclusion applies not just to New Zealand, but to every other country in a multipolar world. Every one faces uncertainties in its role in the future world order; combine them and we end up with uncertainty in the world order itself. We may not be able to resolve them, but we need to be involved in a vigorous debate with a distinctly New Zealand perspective instead of passively drifting in the turbulence of the change.

A transformation of the world economy has been evident for ten or more years--and it was especially apparent during the global financial crisis. Manufacturing began to move away from the North Atlantic economies to poor and middle income countries of East Asia. A reversion to the 18th century pattern of location of industry is occurring. A similar development is apparent in the world economic order--a movement away from the situation where one dominant economy regulated the world economy. The United States has fulfilled this role until recently, but its share of the world economy is diminishing. We face the possibility of a multipolar world of five dominant economies.

NOTE

(1.) 'A Multipolar World Economy., Paper for NZIIA seminar 'New Zealand and the BRIC Group', 24 Nov 2009, at www.eastonbh.ac.nz/?p=1046.

Brian Easton is a Wellington-based freelance economist. This article is the edited text of a presentation he gave at a meeting of the NZIIA's Wellington branch which addressed the topic 'That was the year that was, and the decade' on 16 March 2010.
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Author:Easton, Brian
Publication:New Zealand International Review
Geographic Code:8NEWZ
Date:Jul 1, 2010
Words:1865
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