West may fall in economic might

If economics were a restaurant, the menu would be changing in the next several decades. Peking Duck and curried lamb with jasmine rice might be more popular than French onion soup and Wienerschnitzel. Russian borscht would still be on the menu, but less prominently placed.

"The world center of gravity" is shifting toward the South and toward Asia, says Walter Russell Mead, senior fellow at the Council on Foreign Relations. He predicts the emergence of "a less and less Eurocentric world" by the end of 50 years, even if the European Union makes significant political and economic progress.

This means positions of power and prestige may have to be more widely shared. Fewer Europeans will likely be taking top jobs in such institutions as the International Monetary Fund and the World Trade Organization. China and India may join the prestigious annual Economic Summit, whose participants now include the Group of Seven industrial countries (the US, Germany, Japan, France, Britain, Italy, and Canada) plus Russia. Unless there is an economic disaster, though, living standards in Europe and other industrial nations should continue to rise.

As for the United States, it is "not likely to lose much economic strength," Mr. Mead figures. And Russia, dismissed by many analysts at the end of the cold war as too chaotic to be a major economic power, is coming back, but "it's hard to see it becoming much more important."

Charles Kupchan, another senior fellow at the Council on Foreign Relations, says, "The general story over the next 10 years will be the diffusion of economic power and centers of economic activity." These centers won't outrank the US, but will emerge as focal points in world affairs.

At the moment, the US, EU, and Japan together account for about 80 percent of the output of all industrial nations, nearly 50 percent of world output. Their slice of the world economic pie will likely decline over the coming decades as faster-growing developing nations, such as India, South Korea, and China, build more clout.

A recent study by the EU Commission projects the EU's share of world production falling from 18 percent to 10 percent by 2050 as its population ages and shrinks. Japan is expected to suffer the same demographic fate, with its share declining from 8 percent to 4 percent. The US share will rise from 23 percent to 26 percent. (See chart at right.)

Because of American pique at France's attitude to the war in Iraq, there is speculation that the US may seek change in the G-7 to punish President Jacques Chirac. Harald Malmgren, a Washington economic consultant, talks of the US convening a G-4 meeting of finance ministers, with representatives of the dollar, sterling, the yen, and the euro - and France, Germany, and Italy represented only by a single European official.

Meantime, China is fast becoming the manufacturing workshop for much of the world. With its 1.2 billion people and a rapidly expanding economy, the country produces 11 percent of the $45 trillion in total global output in terms of purchasing power parity, a method of measuring what the domestic currency will actually buy in the way of goods and services. The US accounts for twice that percentage.

In addition, Americans are now buying many clothes and other manufactured goods from China. India provides US high-tech industries with both personnel and software. As the relative importance of these countries' national economies evolves, export and import competition may stiffen for US firms.

Russian resurgence

One major geoeconomic change in the world occurred with the crumbling of the Soviet Union in 1991. It ended the cold war and left the US the world's only superpower. Though Russia, the core of the Soviet Union, still has its nuclear might, its economy collapsed as it strove to make the transition to a market economy "cold turkey."

Under its closed communist economy, the Soviet Union was never a major influence on economic affairs outside the Soviet bloc. Since the bloc's collapse, Russia's role has diminished even further. In 1998, Russia was hit by a debt crisis and devaluation of the ruble.

Since then, however, its economy has revived considerably. Devaluation discouraged imports and encouraged domestic production. Oil prices rose, boosting export revenues. Reforms in tax policy and regulatory systems stimulated business.

At present Russia's gross domestic product is a bit smaller than that of Canada. But Russia's GDP, when adjusted for inflation, could grow 6.5 percent this year and 6 percent next year, predicts Al Breach, chief economist in Moscow for Brunswick UBS Warburg, an investment banking firm.

That growth rate is triple the likely US growth rate at the moment, but still below the official 8 to 9 percent growth rate China has enjoyed for more than a decade.

China has had the advantage of attracting $445 billion in foreign investment, almost $53 billion last year alone. This has had a "transformative effect" on the country's production, says Nicholas Lardy, an economist at the Institute for International Economics (IIE) in Washington.

Is a more stable Russia under President Vladimir Putin likely to attract more foreign investment and zoom forward?

Russia could become more competitive in world markets in products other than raw materials, such as oil and gas.

But it's doubtful it will emerge as a "great economic power," says Mr. Kupchan. "It is generally going in the right direction. In some places it is stuck between the old and the new."

One key problem is that alcoholism, disease, and a low birth-rate are rapidly reducing Russia's population. The nation, though, does have a relatively well-educated population and a potential for reforms that could bring greater economic success.

John Odling-Smee, a Russia expert at the International Monetary Fund, sees "a tremendous will, especially among younger generations, to make up for the time that Russia has lost and the missteps taken in the past decade, not to mention during communist times."

Once feared, now in decline

Only 13 years ago, Japan inspired unease in the US as a rising economic power after 50 years of steamy growth. Book after book speculated that Japan might overtake the US as the dominant industrial economy.

But real-estate and stock-market bubbles broke at the start of the 1990s. Since then, Japan has experienced only slow growth. "Japan is an absolute disaster," says Charles McMillion, an economic consultant in Washington.

Despite the country's relatively stagnant economy, the standard of living of the Japanese people has not declined, and for many it has even risen a little.

Experts hope that a change last month in the governor of the Bank of Japan could bring an even looser monetary policy that, combined with major financial reforms, might restore some economic momentum. If so, Japanese competition in world markets could again prompt tremors.

And the others?

In other world markets, Latin America overall has suffered stagnant living standards (real per capita GDP) for at least a decade. Argentina hit a severe economic bump in 1999.

Mexico and Brazil have established a "stable basis" for economic progress, notes Michael Mussa, a former research director at the IMF. But many wonder if they will capitalize on that promise.

Meantime, Africa south of the Sahara, hit by political troubles and AIDS, has suffered falling per capita GDP for 40 years. Some analysts despair of the continent getting its economic/political footing in the coming decades.

Finally, many of the Asian nations struck by the financial crisis of 1997 have bounced back to their prior economic level. South Korea's economy, for instance, is growing 5 to 6 percent a year. But Mr. Mussa, now with the IIE in Washington, doubts these Asian "tigers" can maintain their astonishing pre-1997 growth pace.

As nations advance economically, their growth rates eventually slow. A former World Bank economist, William Easterly, doubts even China can maintain its break-neck pace indefinitely. Over the long term, and with temporary deviations, industrial economies grow in real terms about 2 percent a year per capita, Mr. Easterly has calculated. But if, as demographers now suspect, global population stabilizes in about 50 years, the global economic consequences will indeed be unprecedented.

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