Global Policy Forum

By Philip S Golub

"The rise of China," writes Professor Angang Hu of Tsinghua University, "resembles that of the United States a century ago (1870-1913). In both cases one sees a strong rate of growth and a higher contribution to the increase in global GDP" . As with the US, this rise "will not only transform China itself, but will change the face of the entire world."

There are indeed some striking similarities: the influx of foreign investment greatly aided both the economic and territorial expansion of the US in the first half of the 19th century, and the intensive industrialisation that took place after the Civil War (1860-65). Successive waves of investment played a vital role in capital formation, extending the transport infrastructure, in colonising and developing territories, and the creation of the integrated internal market . Without these transnational inflows, primarily, but not exclusively, from Britain, the US would not have developed and risen with such speed and vigour.

There is a paradox here. Capitalism is by its nature internationalist, transcending the boundaries of the nation state. At the same time, by investing in new territories, some more than others, it ends up creating powerful states, even hegemonies. The gradual integration of emerging regions into the global economy at the end of the 20th century differs fundamentally from the coercive integration that caused the great North-South divide and the lasting inequalities of the modern global economic system.

The controlled entry of major emerging regions into the global capitalist system in the late 20th century has allowed development of internal (endogenous) growth factors. While China, India and Brazil may be co-dependent on the economies of the Triad (US, Europe and Japan), that has not prevented them from gradually attaining greater autonomy. The proportion of intra-regional trade in East Asia grew from 40% in 1980, to 50% in 1995, to 60% today. This highlights the fact that the strong dependency on the US market (single market dependency) of the 1980s and 1990s is rapidly diminishing.

"World history travels from east to west; for Europe is the absolute end of history, just as Asia is the beginning." This famous statement, from Hegel's Lectures on the Philosophy of World History (1831), sums up the teleological outlook that has dominated western thought since the 19th century. Western "modernity" is often still seen as the culmination of historical progress. The social sciences have long put forward the idea of the singularity, the exceptional character of the West to explain its rapid development and expansion to a position of dominance. From a western point of view, the "stagnation" of Asia in the 19th century (and of the rest of the non-European world) was explained either by its being trapped in cyclical religious and cultural outlooks, impervious to the instrumental rationality that Max Weber identified as essential to modernity, or by its "primitive", pre-capitalist system of economic reproduction (the "Asian mode of production").

False perceptions

These perceptions were completely false: we now know that there were more similarities than dissimilarities in the standard of living, expertise, market institutions and economic activity in the eastern and western parts of Eurasia before 1820; that because of the size of their populations, non-European economic regions were by far the largest; and that China and India (and the Ottoman empire) were at the centre of dense regional trading networks. It was not until the West imposed its economic and territorial expansion on the rest of the world that international hierarchies were created, breaking the world up into dominant centres, and dependent peripheries.

This brief reminder allows us to understand the historic nature of the redistribution of power to the major emerging regions of East Asia, Latin America and South Asia that is occurring today. Having been confined to the margins in the past, these regions are now becoming what the French economist Franí§ois Perroux called economic active units, which do not "simply adapt their programme to it the environment, but adapt the environment to fit their programme".

This is the most important transformation of the world since the European industrial revolution at the beginning of the 19th century. It upsets the hierarchies created by the economic and territorial expansion of the West, and marks a return, in new historic conditions, to the polycentric world that existed before 1820.

One of the main features of this transformation is the steadily growing power of Asia. After Japan and the newly industrialised countries (NIC) of Northeast and Southeast Asia, which managed to break out of the "third world" in two generations, China and India have been in a phase of remarkable expansion since the 1980s and 90s. With 33% of the world's population, their share of global gross domestic product (GDP), calculated in terms of purchasing power parity (PPP), has risen from 3.2% and 3.3% respectively in 1980, to 13.9% and 6.17% in 2006 (while global GDP has tripled). At the same time the GDP (PPP) per inhabitant, a more subtle measure, has increased by a factor of 16 in China ($419 to $6,800) and by a factor of five in India ($643 to $3,490). The share of global GDP produced by Asia as a whole, currently 34%, should reach nearly 45% in 2020: 20% for China, 9% for India and 6.2% for Japan (the total share for "emerging" regions is estimated between 55% and 60%).

The rise of these emerging regions has a direct effect on the workings of the world economy: reorganisation of the global division of labour, deflation in the price of manufactured goods on a wide range of products, inflation in the price of raw materials – a redistribution of wealth in favour of emerging countries, which are accumulating immense surpluses. (Their cash reserves are estimated at more than $3,000bn – 70% of the world's total reserves – compared with $800bn in 2000.) Will the current change be smooth?

So financial power is spreading beyond the US, the centre of the financial world since 1919. The US financial model is also in crisis: big Wall Street firms (Citigroup, Morgan Stanley etc), the City of London (Barclays) and Switzerland (UBS) have had to call on the sovereign funds of China, Singapore and the Gulf States to assure their survival ($46bn of sovereign funds have been invested in western banks and brokerage firms since June 2007, 33% of their recapitalisation prior to the most recent crash).

Structural transformations of this kind are rare in history. Given our limited capacity to scan the historic horizon, it's impossible to say whether the current change will occur smoothly, given the scale and complexity of the internal and external challenges thrown up by the extraordinarily rapid development of the most populous parts of the world. But, failing a systemic crisis from internal or external factors, which is unlikely, it would seem to be irreversible. Of course, major shifts in the centres of power in the past have been associated with systemic international crises: it took the Napoleonic wars to open the way for Pax Britannica, and two world wars for the US to become the new centre of the global economy.

We can only hope that this time the main players will be able to preserve the peace. Unlike in 1815 or 1914, the world is not about to shift from one dominant centre of power to another; instead it is fragmenting into multiple centres. In an interdependent world, faced with global problems which cannot be solved on a national or even regional level, reinforced international cooperation is an historic necessity. That at least is the hope. That China chose to use its sovereign funds to help Wall Street is politically significant – Beijing wants to forge links of interdependence with one of the key elements of US power. The West, used to being the centre, will have to accept a new, more pluralistic, world.