Go East

Forget the "Global South". The rebalancing of the global economy boils down to one single trend: the unstoppable rise of Asia.

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The rebalancing of the global economy has major geopolitical and financial implications. Emerging markets now account for 60% of the global economy from 40% in 1990 — while advanced economies suffered a commensurate decline.¹

Economic strength fuels geopolitical assertiveness, and we’ve heard a lot about the “Global South” pushing against western powers to rewrite international institutions on its own terms. The BRICS (Brazil, Russia, India, China and South Africa) have been mulling a plan for a common blockchain-based payments system, and perhaps even a new BRICS currency, to reduce the dominance of the US dollar.

The economic data, however, tell a different story from the revenge of the Global South. It’s the rise of the East.

The rise of the East

Source: IMF

In 1990, the European Union and the US together accounted for nearly half of world GDP. Today their combined weight doesn’t reach one-third, overtaken by Emerging Asia. The rest of the “Global South”? Latin America has lost ground, the Middle East and Africa have remained stuck in place.

These numbers are influenced by population size, and emerging Asia has two giants: China and India together hold almost 3 billion people. A more interesting question is whether living standards are getting closer to the West.

Source: IMF

As you see from the chart above, Emerging Asia has been catching up fast. In 1990, the region’s real average income was just 5% of the US level; today it’s over 20%. By contrast, in Latin America, the Middle East and Africa, the income gap with the US has widened. Asia, not the “Global South”.

A tale of two Europes

The European Union has held steady at about three-quarters of US income levels. But Europe is a tale of two cities. Look at the next chart:

Source: IMF

Here I’ve added Central and Eastern Europe, and you can see its incomes have been rising at a robust pace, from one-third of US levels in 1990 to nearly one-half today. A number of Eastern European countries are EU members. So, if the EU as a whole is unchanged while its eastern members have been rising, that means…

Source: IMF

…that Western European countries have seen their income gap with the US widen, while their eastern peers have been catching up (chart above). Even within Europe, go east!

In emerging Asia, by contrast, the positive trend is uniform. China’s performance has been especially impressive, from a mere 4% of US levels to over 30%; but Malaysia has also enjoyed a robust rise, from one-quarter to one-half of US levels; Thailand, Indonesia and Vietnam have improved a lot, and everyone else has also been making progress.

Source: IMF

The aging curse?

Will worsening demographics halt the rise of Asia? Fertility rates in the main emerging Asian countries have been dropping fast; today only Cambodia is comfortably above the replacement rate of 2.1 children per woman, with Indonesia right at the threshold and most everyone else below.

Source: U.N.

But slowing demographics are not unique to Asia. The next chart gives a snapshot of current fertility rates in selected countries across the world. I’ve color-coded the bars to distinguish Asia, Latin America, Eastern Europe and advanced economies. Besides the fact that nearly everyone here is below replacement, you can see that Asia does not stand out as particularly affected.

I’ve included Singapore and Korea to make an even more important point: that an aging population does not necessarily imply that living standards will stop improving. The fertility rate in Singapore fell below replacement in the mid-1970s; in Korea in the mid-1980s.

Source: U.N.

And yet:

Source: IMF

In both countries real per capita incomes kept rising. Korea is now on a par with the EU, and Singapore’s per capita income is nearly double the US level.

An aging society can put strain on resources, and like many challenges it can be more daunting at larger scale, so China and India will need to play it carefully. But sustainable welfare systems, reliance on older workers and smart immigration policies can go a long way. Singapore and Korea are obvious examples. At the other end of the spectrum, Africa and the Middle East suggest that strong demographics are not necessarily an asset.

Go East

Go east, therefore. But should you head to the eastern portion of Europe, or to Asia?

My advice is Asia. For two reasons. First, you know I’m bearish on the EU and its maniacal regulatory zeal. I’m worried that EU membership will cap the upside for the likes of Poland and Hungary.

But more importantly, because Asia keeps investing in human capital. Learning outcomes have been dropping across the OECD, and horror stories about evaporating literacy and numeracy in the US keep making headlines. Meanwhile the OECD’s PISA results show that Asian countries continue to outperform, notably in science and math, as the chart below shows. And that, I believe, will make all the difference.

Go East.

1. On a purchasing power parity (PPP) basis.