The growth economies are only a few decades old. They are overcoming the hurdles of their colonized past. Now their influence is growing in a world order which hasn’t kept their interest at the core.
NEW DELHI: Power equations, national strengths, economic influence change over decades. The changes are often noticed after they have occurred. New realities are recognized belatedly and often reluctantly.
The key players in the global economy can be divided into two categories now. The legacy economies and the growth economies. Legacy economies are mostly in North America and Western Europe.
Legacy economies have been dominant for a few centuries. Most of them grew by exploitation of colonies and by converting the extracted wealth to fuel their own future. Even in the post-colonial world, their strength and influence allowed them to create a world order suited to their interests. Their growth rate ranges from 1-4%.
The growth economies are only a few decades old. They are overcoming the hurdles of their colonized past. They are fighting against the odds in a world order which doesn’t keep their interest at the core. They are a bit more disparate lot, spread across South America, Asia and Africa. But their growth rate is between 5-7%.
The relationship between these two groups have been lopsided. Legacy economies produced while the rest of the world consumed. Legacy economies prefer that growth economies rise to the level of being good consumers. Growth economies are celebrated as long as they consume the products and services of the legacy economies. But the tipping point appears when growth economies become strong enough to produce for themselves and compete with legacy economies.
Countries that were champions of globalization for decades are now discovering their ill-effects. For them, globalization has a simple definition. Legacy economies must be the dominant producers and other economies must be the pliant consumers. If other economies grow strong enough to produce and compete globalization will be in danger. Now North America and Western Europe are walking back from their unbridled support to globalization. Under the World Trade Organisation (WTO) rules, market access to developing economies was demanded. But market access to their own economies are barricaded with non-tariff barriers. When the developing economies questioned and effectively rebelled against unfair norms, WTO as a global platform lost its relevance.
The rise of China and India in recent decades has offered ample evidence of this fear of growth economies. After rules on quality and health, new non-tariff barriers like CBAM have been trotted out to protect the markets of legacy economies.
For decades EU demanded low duties to export their cars to developing countries. EU bullied many countries to lower their tariffs to ensure higher market access for their cars and other products. The wheels are spinning in the opposite direction now with EU raising tariffs on EV cars from China. Earlier EU would take other countries to WTO for easy market access. Now EU is being dragged to WTO. China has filed a case in WTO against EU for imposing import duties of up to 35% on electric vehicles from China. EU alleges that the Chinese exports were unfairly undercutting EU industry prices. The duties are set to remain in force for five years.
SELF INTEREST OVERRIDES COLLECTIVE BENEFITS
There was a time when legacy economies worked broadly in tandem. US, UK, Australia and Canada developed strong business linkages between themselves.
The western European economies came together in an impressive manner with a common currency more than two decades ago. Those years of synchronized growth for legacy economies may be behind them now.
Falling growth in Eurozone and the decline of manufacturing in North America have changed equations. Brexit was an important turning point in creating cleavages between the legacy economies. By leaving the European Union, UK demonstrated the increasing unease with globalization which the legacy economies had championed for decades.
The first Donald Trump presidency in the US triggered another point of conflict between legacy economies over regional security arrangements. The US made it clear that it would no longer be able to pay for Europe’s security within North Atlantic Treaty Organisation. As things stand today, over 80% of NATO funding is from non-EU members. But EU depends on NATO for 75% of its air defence cover. EU was an effective model but its success made it giddy. Rapid expansion of its members without accompanying structural changes has severely hampered its efficiency and decision making. With Trump back as President, the rift between legacy economies will expand. Trump has made it clear that US policy will focus on its own interest and will not coddle the priorities of EU or other allies.
New economic formations are forming and strengthening with growth economies leading the way. The mindset of EU also is stuck in the glory days of world dominance. As a result it has not been able to finalise a free trade agreement with India despite a decade long effort. Meanwhile, India went ahead and concluded the European Free Trade Association, group of four small but strong economies of Switzerland, Norway, Iceland and Liechtenstein. These four countries were more nimble, pragmatic and realistic about the new economic equations of the world. While EU remains stuck with a legacy mindset, smaller economies are recognizing the emerging economic terrain of the world.
There are larger and more significant formations. G20 now includes the African Union. But more consequential is the expansion of BRICS to include many new countries. Weary of the constant weaponization of trade and investment, these countries are now coalescing to stand up TO the financial bullying by legacy economies. Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates have joined the original group of Brazil, Russia, India, China and South Africa. The 13 nations that have become partners of the BRICS are Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkiye, Uganda, Uzbekistan, and Vietnam. These partner nations will eventually become full members of BRICS.
These economies may appear disparate but are bound by a common angst of being neglected and undermined by global institutions created by legacy economies. Global bodies like the WTO, World Bank and IMF were created and remain under the control of legacy economies. The formation of the BRICS bank was an attempt to create an alternate financial institution. The weaponization of the banking system SWIFT during the Ukraine war was the last straw for many.
The BRICS is not an anti-West alliance, but it hopes to create new economic linkages which are not exploitative, focused on the priorities of growth economies.
With President Donald Trump taking charge of the US again, the second term will accelerate the divide within legacy economies. Each of these will now work with the growth economies for their continued success. Instead of working within the rich countries club, the legacy economies will seek out the growth economies for bilateral strategic linkages. Growth economies on their part will have to build on their groupings to improve trade, investment and financial linkages.
The next few years will see a reordering of the power structures of the global economy. Growth economies are now ready to offer a strong challenge to legacy economies. They have two advantages over the legacy economies: large consuming populations and rising manufacturing capabilities. Powered by these two advantages, growth economies can now drive the global agenda.
* Pranjal Sharma is a geo-economic analyst and author of “The Next New”.