Emerging Markets Impact on Companies in Developed Countries, Term Paper Example

Fareed Zakaria, in The Post American World, says that we are now experiencing “the third great power shift of the modern era”, in what he calls the rise of the rest. Economic growth in some countries in the past two decades has been unprecedented. Since 1989 and the opening of the Chinese economy the growth has been most visible in Asia. According to Zakaria that is no longer the case. In 2006 and 2007, nearly 125 countries grew by more than four percent. Of this number, thirty countries were in Africa or nearly two thirds of that continent. Further, leading economists, such as van Agtmael, predict that of the twenty-five companies most likely to be the world’s next great multi-nationals, four come from Brazil, Mexico, Korea, and Taiwan; three from India; two from China; and one each from Argentina, Chile, Malaysia, and South Africa. (Zakariah: 31)

Prophetically, the suggestion is that we should not be surprised to learn that the tallest buildings in the world are not in Chicago or New York-they are in Dubai and Malaysia. The biggest aero planes are made in the Russia, not the United States. This growth of Brazil, Russia, India, and China-BRICs-is the gestation period of the new global economic entity which experienced its embryonic phase in the last decade of the twentieth century. According to Zakaria and others such as Goldman Sachs, there is a corresponding power shift as well. (Zakariah: 31)

The facts: in the past ten years, BRIC economies have contributed to more than one third of the world’s GDP growth and went from being sixteen percent of the world’s economy to nearly a twenty-five percent. The last decade of the 20^thcentury, saw the arrival of the BRICs-this is the second decade of their lifespan as players on the economic stage.

Goldman Sachs envisages the BRICs to overtake the economy of the United States by the year 2018. It predicts that Brazil’s economy will be larger than Italy’s in the year 2020. Further, India and Russia individually will have economies larger than those of Spain, Canada, or Italy. Goldman Sachs predicts that the next decade will bring a rise in what they refer to as the New BRIC middle class. In the first decade of this century, people with incomes greater than $6,000 but less than $30,000 grew by hundreds of millions. However-the next decade-the one we are in now-will see tremendous growth in the size of the middle class in the BRIC nations. This trend has implications not the least of is increased demand for products by BRIC nations. (Goldman-Sachs)

The Question: will the BRIC countries overtake the G7 in the decade ahead? It is almost a certainty that economies in the BRIC such as Brazil and India will surpass many of the G7 nations in before the end of the decade in 2020, sooner in the case of the United States in 2018. That is why many investors and politicians have now shifted their focus to the BRICs because they know they are and will play an important role in the decade to come. The BRIC as a bloc is responsible for more than 36% in growth in the world’s GDP in the first decade of this century and make up more than 25% of the global economy. India and Russia will each have economies larger than Canada, Spain, or Italy and by 2020 will produce nearly one third of the world’s economy while at the same time contribute about 50% of the GDP global growth. (Goldman-Sachs)

The BRIC middle class is expected to experience major growth in the coming decade with incomes between $6,000 and $30,000 defining the BRIC middle class. It is expected that China will lead middle class creation followed by India. Russia and Brazil have rising middle classes as well. There will also be growth in the upper class with income earners greater than $30,000. With changing spending patterns amongst a growing middle class, environmental pressure will increase due to the demand and increased consumption of resources.

With industrialization and growth, the middle class grows and it drives global consumption which in turn leads to growth in the GDP a median value, which in the case of the BRIC is between $1,000 and $3,000. At the same time, savings and investments rise as consumption falls. China and India in the last decade have remained within the lower range of income values and as a result their share of consumption is correspondingly lower while savings have been higher. This is a key threshold with hundreds of millions of incomes in the BRIC rising above that point annually. This implies that with the accelerated demand for goods and resources will be affected by the type of products being imported annually into the BRIC from the industrialized world. Thus, importation of low value added goods will fall while high value added goods such as cars, office equipment, and technology will rise. (Goldman-Sachs)

The question: Will the BRIC, and specifically, China and India, dominate the 21^st century global economy? The answer is a qualified yes and it will do so according to Goldman Sachs in the mid 21^st century. Economists are convinced that the economies of China and India will drive economic growth. Clearly, a huge tectonic shift in the world’s economic centre of gravity is going to take place and seems to imply that the output will be a gloomy one for the United States and by extension, the G8. Will China and India be the only beneficiaries of their growing economies or will the West prosper as well?

There are three factors that drive economic growth. The first is capital or the physical means of production such as factories: an increase in the capital will increase production. The second is labour. Demographic trends aid in predicting the need for particular workers in a country in the future. Education and skill can raise the quality of workers to increase production. The third factor is technology in the ways that capital and labour combine to produce greater output without increasing capital or labour. A fourth concept is the notion of diminishing returns. This suggests that as we increase capital eventually we reach the point where the returns are only modest. Once all the workers are trained there is little return on the training investment from that point onward.

The BRIC are relatively poor nations despite the wealth being generated by their growth. China is poorer than many countries in Asia, such as Malaysia. Yet if we compare the output per worker-GDP-of China to the USA, we will see that China produces 1/20^th per capita what the US can produce today. India can produce about 1/40^th of the US. Their poverty presents opportunity for technology. Low levels of capital reflect low levels of output per worker. Low levels of output reflect low levels of education and skill meaning they could benefit from an expansion of the education system. Low output levels reflect low levels of technology. These low levels present enormous opportunities for the West to transfer Western technology to the BRIC. Thanks to these factors the BRIC has the potential to grow more rapidly than the West for many more years.

Economic history shows us that this catching up process takes time to accumulate capital, raise the skill level of workers, and to absorb foreign technology. These economic realities are reflected in the post war history of Japan and Germany for example each of who lost skilled workers and capital during the war. Japan’s output per capital relative to the US dropped sharply due to the war.   In the thirty years after the war, the economies of Germany and Japan grew much more rapidly than the US or Britain due to low levels of output per worker. Both invested heavily in education, skills, and technology. As they grew richer, their economic growth slowed sharply and the closer each came to America’s or Britain’s production levels, the slower their economies grew. This is the notion of diminishing return.

Using this example, we can predict that even though the economies of the BRIC and China and India in particular will grow faster and even overtake the G8 or US economies in terms of size, these countries will still be poorer than Britain or the United States. By the time China and India overtake the US economy in 2050 for example, they will have a population of more than four times as great as the United States will at that time. This means that India and China will only have to achieve an output per person that is a quarter that of America and will reach that point in the next few decades. As the BRIC economies grow and mature, they will present opportunities for the West that will enrich our lives in the same way that Britain benefited after the rise in the American economy.

The economic landscape in the next forty years will look have China as number one, the United States as number two, and India number three. Does this suggest or imply a threat to the economic interests of the G8 or the United States? We know that historically, Britain was the first economic economy in Western Europe and lost its lead when the American economy surpassed hers. We can see that in comparison, the United States was to Britain what the China and India and the BRIC represent today to the G8 and America.

What the British found was that the British economy and her people prospered greater under American economic hegemony, than they had under their own even as the dollar was replacing the pound sterling as the standard. By the year 2000, the Britain was once again the biggest GDP country again in Western Europe, even surpassing France and Germany. This all came about because even though the British market share shrank, it found an outlet for its technological expertise in three very fast growing economies at the time-Germany, Japan, and the United States.

The point here is that economic success abroad-China, India, Brazil, and Russia-are not threats to the G8 or the United States economies and in fact should reinforce the living standard of the Western nations at home. It seems only logical to conclude that if Britain could prosper from the rise in the foreign economic powers such as Germany, Japan, and the United States, the same can be said about the United States, the G8 and Britain today. Each has an opportunity to prosper from the rise of the economies in the BRIC.

The one negative prospect on the horizon is the environmental one that looms as a result of the rise of the BRIC. With increased populations and industrialization in the past half century since the end of the Second World War, there has been a rise in the global temperature, melting ice caps, and damaged ozone layer in our biosphere. The air that we breathe and the water we has suffered due to economic growth. In other words the natural resource of earth has experienced tremendous pressure environmentally. Yet we can predict in the next decade there will be greater demand in both China and India for electricity. Each will be constructing coal fired power plants, with expected emissions to exceed five times the savings of the Kyoto accord. This provides the G8, Britain, and the United States with opportunities to transfer environmental technologies to the BRIC, and other emerging economies. (Zakaria: 31)

References

Zakaria, Fareed. The Post American World. (2008). W. Norton and Company. New York.

Wilson, Dominic. Kelton, Alex L. Ahmed, Swarnali. Is This the BRICs Decade? BRICs Monthly. (May 20, 2010). Issue no: 10/02.

Fang, Cheng Hui. Gutierrez, Margarida. Mahajan, Arvind. Shachmurove,Yochanan. Shahrokhi, Manuchehr. A future global economy to be built by BRICs. (2007). Science Direct. 18:143-156.

Samualson, Robert J. What’s the Biggest Threat to the US Economy? (July 02, 2007). Newsweek. New York. Vol: 150. Iss: 1/2. Pg. 55.