Has global economic crisis brought an end to the Third World?

Above: The modern G-20 was borne out of crisis. It showed its potential by quickly acting to shore up confidence. The question now is whether this was an aberration. Photo/REUTERS
Above: The modern G-20 was borne out of crisis. It showed its potential by quickly acting to shore up confidence. The question now is whether this was an aberration. Photo/REUTERS 

For decades, students of security and international politics have debated the emergence of a multipolar system. It’s time we recognise the new economic parallel.

If 1989 saw the end of the “Second World” with Communism’s demise, then 2009 saw the end of what was known as the “Third World”: We are now in a new, fast-evolving multipolar world economy – in which some developing countries are emerging as economic powers; others are moving towards becoming additional poles of growth; and some are struggling to attain their potential within this new system – where North and South, East and West, are now points on a compass, not economic destinies.

Poverty remains and must be addressed. Failed states remain and must be addressed.

Global challenges are intensifying and must be addressed. But the manner in which we must address these issues is shifting.

The outdated categorizations of First and Third Worlds, donor and supplicant, leader and led, no longer fit.

The implications are profound: For multilateralism, for global cooperative action, for power relationships, for development, and for international institutions.

The global economic crisis has shown that multilateralism matters.

Staring into the abyss, countries pulled together to save the global economy.

The modern G-20 was borne out of crisis. It showed its potential by quickly acting to shore up confidence.

The question now is whether this was an aberration, a blip?

Will historians look back on 2009 and see it as a singular case of international cooperation or the start of something new?

Some now view Woodrow Wilson’s attempt to create a new international system after World War One as an opportunity lost that left the world adrift amidst dangers.

Will this be a similar moment?

The danger now is that as the fear of the crisis recedes, the willingness to cooperate will too.

Already we feel gravitational forces pulling a world of nation-states back to the pursuit of narrower interests.

This would be a mistake. Economic and political tectonic plates are shifting.

We can shift with them, or we can continue to see a new world through the prism of the old. We must recognize new realities. And act on them.

What is different? The developing world was not the cause of the crisis, but it could be an important part of the solution.

Our world will look very different in 10 years, with demand coming not just from the United States but from around the globe.

Already we see the shifts. Asia’s share of the global economy in purchasing power parity terms has risen steadily from 7 per cent in 1980 to 21 per cent in 2008.

Asia’s stock markets now account for 32 per cent of global market capitalization, ahead of the United States at 30 per cent and Europe at 25 per cent.

Last year, China overtook Germany to become the world’s biggest exporter.

It also overtook the United States to become the world’s largest market for cars.

Import numbers tell a revealing story: the developing world is becoming a driver of the global economy.

Much of the recovery in world trade has been due to strong demand for imports among developing countries.

The world economy is rebalancing. Some of this is new. Some represents a restoration.

According to Angus Maddison, Asia accounted for over half of world output for 18 of the last 20 centuries.

We are witnessing a move towards multiple poles of growth as middle classes grow in developing countries, billions of people join the world economy, and new patterns of integration combine regional intensification with global openness.

This change is not just about China or India.

The developing world’s share of global GDP in purchasing power parity terms has increased from 33.7 per cent in 1980 to 43.4 per cent in 2010.

Developing countries are likely to show robust growth rates over the next five years and beyond.

Sub-Saharan Africa could grow by an average of over 6 per cent to 2015 while South Asia, where half the world’s poor live, could grow by as much as 7 per cent a year over the same period.

Growing ties

Southeast Asia has become a middle income region of almost 600 million people, with growing ties to India and China, deepening ties with Japan, Korea, and Australia, and continuing links through global sourcing to North America and Europe.

The Middle East region is an important source of capital for the rest of the world, and increasingly a business-service hub between Asia – East and South – and Euro-Africa.

In the Latin American and Caribbean region, 60 million people were lifted from poverty between 2002-2008 and a growing middle class boosted import volumes at an annual rate of 15 per cent.

Tectonic plates could shift further. Africa missed out on the manufacturing revolution that lifted East Asia’s economies out of poverty and into prosperity.

But Africa no longer needs to be left behind.

Today, in many African countries even small, inexpensive items, such as soap or slippers, or basic tools or consumer goods, are imported.

If Africans remove the barriers to producing these goods domestically and to local entrepreneurship, while creating conditions for outside investors to shift production to Africa, then African development could begin to look very different.

Unlike past failed efforts to favour import-substitution interests behind protectionism, this approach can capture benefits from regional integration within global markets.

What would it take? As a first step, the 80 per cent of Africans earning $2 a day or less need to earn enough income so they will be able to buy basic consumer goods.

Agriculture is the main source of jobs and an early opportunity to boost productivity and income.

To do so, investment is needed all across the agricultural value chain: property rights; seeds; irrigation; fertilizer; finance; basic technologies; storage and getting product to market.

Since about two-thirds of African farmers are women, we need to help them get legal and property rights, and access to services.

With slightly higher incomes and living standards, local manufacturers can target or customize for the local market, and eventually for export.

To grow further, Africans need the things that Europe and Japan needed after World War Two: infrastructure; energy; integrated markets linked to a global economy; and the conditions for a vibrant private sector.

These public goods will foster much more than local manufacturing.

Today’s shifts open new opportunities.

As the global crisis hit, some Chinese recognized that it was time to move beyond toys and footwear; China could move up the value chain, increase wages and consumption, and expand its “harmonious society.”

Chinese companies, in turn, could move lower value-added manufacturing elsewhere, including to Africa, following China’s resource developers and construction enterprises.

Chinese companies can be encouraged to relocate manufacturing for both domestic production and export.

These manufacturers bring know-how, machinery, as well as access to marketing and distribution networks.

The World Bank is working with Africans and Chinese to create industrial zones.

Early investors are sensing the promise in Africa and are not dissuaded by the risks – after Lehman Brothers and Greece, investors know developed markets can be risky, too.

Changes in government policies can create opportunities for private sector growth, which in turn offers services to other entrepreneurs.

In the ten years to 2008, the private sector has invested more than $60 billion in information and communications technology in Africa; 65 per cent of Africans are now within reach of wireless voice services, and there are 400 million mobile phones in use in Africa.

IFC, the World Bank Group’s private sector arm, is helping catalyse this business revolution.

A new IFC equity fund has attracted $800 million from sovereign wealth and pension funds to invest in companies in Africa, Latin America and the Caribbean.

Increased income and growth in the developing world means increasing influence.

The old world of fireside chats among G-7 leaders is gone.

Today’s discussion requires a big table to accommodate the key participants, and developing countries must have seats at it.

In discovering a new forum in the G-20, we must be careful not to impose a new, inflexible hierarchy on the world.

Instead, the G-20 should operate as a “Steering Group” across a network of countries and international institutions.

Take financial reform: the world has paid a big price for the breakdowns of the global financial system in lost jobs and ruined lives.

Of course we need better financial regulation, with stronger capital, liquidity, and supervisory standards.

A new supervisory framework should consider systemic risks, reverse regulation that reinforces the ups and downs of cycles, consolidates supervision to avoid gaps, and considers inflation in asset prices as well as in goods and services.

But beware unintended consequences.

We should not compound costs by encouraging financial protectionism or unfairly constraining financial services to the poor.

Regulations agreed in Brussels, London, Paris or Washington might work for big banks in the developed world.

But what about the smaller ones, whether in developed or developing countries?

These regulations could choke off the financial sector, innovation, and risk management in developing countries.

They could make it harder to invest across national borders.

Climate change

Take climate change: The danger is that we take a rule book from developed countries to impose a one-size-fits-all model on developing countries. And they will say no.

Climate change policy can be linked to development and win support from developing countries for low carbon growth – but not if it is imposed as a straitjacket.

This is not about lack of commitment to a greener future. People in developing countries want a clean environment, too.

The developed world has prospered through hydro electricity from dams.

Some do not think the developing world should have the same access to the power sources used by developed economies.

For them, thinking this is as easy as flicking a switch and letting the lights burn in an empty room.

While we must take care of the environment, we cannot consign African children to homework by candlelight or deny African workers manufacturing jobs.

The old developed country prism is the surest way to lose developing country support for global environment goals.

Developing countries need to recognize that they are now part of the global architecture.

They have an interest in healthy, dynamic, flexible international systems for finance, trade, movement of ideas and people, the environment-- and strong multilateral institutions.

We need to find points of mutual advantage, making reciprocal gain possible.

At the same time, we must recognize domestic political constraints and local fears.

We need accords that every leader can sell at home. Development is no longer just North-South.

It is South-South, even South-North, with lessons for all with open minds.

Old concepts of aid

Nor is the future of development only about old concepts of aid: The sovereign and pension funds wanting to invest with the World Bank Group in Africa represent a new form of financial intermediation. This is not charity.

This is investment looking for good returns.

IFC is helping to lower information barriers and cut transaction costs.

It is our aim to do nothing less than revolutionize financial flows to developing countries

The crisis has shown the possibilities of international cooperation, but it has also underscored the need to modernize and strengthen multilateral institutions to reflect a different world.

Since the full force of the crisis hit in mid-2008, the World Bank Group has committed more than $100 billion to support developing countries.

This broke all historical records. And I want to especially thank the World Bank Group staff who have risen to this challenge.

We got money where it is needed –fast.

Even though the World Bank Group has traditionally been a lender on long-term projects, our development disbursements have exceeded the IMF’s crisis payments.

Reform cannot be a one-time effort. It must be a constant --adaptation and re-adaptation, with continuous feedback loops to meet changing realities.

Predict the future

We cannot predict the future with assurance. But we can anticipate directions –and one is that the age of a multipolar global economy is coming into view.

This is no aberration, no blip. We still live in a world of nation-states. But there are now more states wielding influence on our common destiny.

They are both developed and developing, spanning all regions of the globe. This can be all to the good. But the contours of this new multipolar economy are still forming.

It needs to be shaped.

The modern multilateral system needs to fit these changes.

Zoellick is President The World Bank Group