Many of the reports reflecting on the annual meeting of the World Economic Forum that took place in Davos last week suggest that the center of world power is shifting. In fact, there may no longer be a center.
The mood of the event seems to have mirrored what economists have been talking about for quite some time now. Emerging markets are flexing their muscles and are steadily surpassing the traditional economic powers.
The Global Economics Paper published by Goldman Sachs in 2003 suggested that BRIC countries (Brazil, Russia, India, and China) would grow to half the economic size of G6 (France, Germany, United States, Japan, United Kingdom, Italy) by 2025 – up from only 15% at the time. Their predictions are becoming a reality and the question is not whether it will happen, but rather when. The Economist’s “Survey of the World Economy” published in September 2006 revealed the magnitude of the powerful growth emerging markets are experiencing, growth that has pushed their share of global economic output past 50%.
Foreign investments are reaching places where their presence even a decade ago would be unthinkable. People in developed economies prefer to invest their savings in stock exchanges in Asia and Latin America over Japan and Western Europe. Corporations from emerging markets are increasingly recognized as global powerhouses and innovators.
Yet, while the balance of economic power in the world continues to change and there may not be one defined leader, it does not necessarily mean that the global economic system will begin to break down.
The global economy is just that – global. It does not have a command center. It is not driven by a few companies and it is no longer driven only by a small group of countries.
Rather, the global economy should be viewed as a system driven by rules. Those rules guide financial transactions, provide access to resources, enforce contracts, ensure transparency and predictability, and create opportunities for innovation and investment.
Such rules include the Basel Committee’s Core Principles for Effective Banking Supervision, the OECD Principles of Corporate Governance, the IMF’s Code of Good Practices on Fiscal Transparency, international accounting and auditing standards, and others.
Countries’ compliance with many of these international standards is captured in the IMF’s Reports on the Observance of Standards and Codes (ROSC). ROSCs provide a glimpse into the institutional complexities of today’s world, the interdependency of economic and political systems, and reforms taking place in all corners of the global economy.
Implementation of these standards is one of the determining factors of a country’s ability to remain competitive and provide opportunities for its citizens to succeed.
The point here is that these principles, which help to create an environment within which the global economy can function effectively, are not developed in or applied solely in North America, Europe, Latin America, Africa, Asia, or the Middle East. They are international in their development and application.
The global system is under construction and the need still exists for new rules that guide the behavior of markets, ensure transparency in political and economic arenas, and facilitate business transactions. Much work remains to be done in developing effective ways for engaging the private sector in the development of these standards.
Nonetheless, the ongoing development of international rules and their effective implementation will facilitate economic transactions and extend opportunities for all people to succeed.
As these rules break down barriers and bring governance and transparency to markets around the world, they will help to improve the way countries and economies are run, reduce the size of the informal sector, and lift millions out of poverty. Today, the main task of development assistance should be to enable more developing countries to join into the rules based international system.