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Global politics is being totally reshaped, says Lord Mandelson

Thursday, 17 September 2009 15:39

Lord Mandelson's speech at the Economist’s Emerging Markets Summit: When I was EU Trade Commissioner my friend the Indian Trade Minister Kamal Nath always used to hate the term ‘emerging world’. When I used it, he referred to the developed countries as the ‘submerging world’. I think he liked the way it made us nervous.

There has always been a lot of bad zero sum thinking about the shift behind this joke. An assumption, if you like, that there can’t be an emerging world without a submerging world.
Partly that’s a reflection of the speed with which it is happening. Few people would have predicted in the early seventies that the Asian coasts of the Pacific would be the fastest growing part of the global economy for the next four decades. The social impacts on both sides are big, and they are being imposed very quickly.

But change – I underline - doesn’t inherently imply absolute loss or decline. Obviously the geopolitics of this shift are huge and significant. There is a new pressure on resources, and whole new set of claims to global political influence and power. Whenever the political landscape changes in this way there will be friction. Our job is to recognise and defuse it.

At the level of individual firms or even industries the consequences are also potentially huge - because comparative advantage is playing out in all sorts of new ways. But in aggregate the economic effects are a much more positive picture.

What I’d like to do this morning is to say a little about the industrial and geopolitical implications of the business landscape described in the report we’re publishing today with the Economist Intelligence Unit. My basic point is that I think the idea of decoupling is something we need to treat with a bit of scepticism, or at least be very clear what we mean. Most of what will shape the next decade or so flows from how coupled the developed and emerging worlds really are.

The report: survive and prosper

The report we’re publishing today has a few basic messages. First, the basic conditions in the emerging economies are varied and not universal. China and India have continued to grow rapidly, although at less than the trend rate of the last decade. Other parts of the emerging world are also performing well relative to the rich world, but well below recent trend.

On a more positive point, most of the 500 plus companies surveyed by the report are cautious about quick recovery but they were very positive about the long term potential of the emerging economies.

It’s clear that many British businesses have been able to hedge their recession performance thanks to a strong presence in the emerging economies. And they do see a long game in which WTO-membership and improving legal and commercial environments will make it easier to do business there. Certainly, growing and increasingly prosperous populations make these markets a huge potential source of growth and jobs.

Most projections of China and India alone suggest an urban middle class of over a billion in a decade or so. Asia, Brazil, Latin America and Russia represent new markets so big that even their niche segments are huge opportunities. And the markets created by big societal and technological shifts like climate change are literally massive. British companies came back from my visit to China last week with half a billion dollars in business, much of it in low carbon.

But the change is not just in the creation of new markets to sell into, and new sources of capital. Competition from the emerging economies has pushed us up the value chain and put heavy pressure on costs in the tradable sector. It has fragmented and reshaped global supply chains, so that British firms are producing specialist intermediate goods, or focusing on design and marketing as opposed to assembling complete products.

Policy wise, the UK is taking this projected growth very seriously. We’ve recognised that although competition from the emerging economies will put pressure on parts of the UK economy, the aggregate gains in new markets, more effective production models and cheaper goods easily outweigh these if we can help people and industries adapt. And that’s true for the whole of Europe.

We’ve ramped up UK Trade and Investment resources dedicated in the emerging markets, and also to attracting some of the rising levels of FDI and state-backed investment that are now coming out of these markets. We’ve also been targeting the specific opportunities coming from the big stimulus packages in some of the emerging economies.

The challenges of growth

I think we do have to ask, though, whether this model of continued growth is a realistic scenario - I think it is. But it obviously comes with challenges. China, for example, will need to continue to reform its state banking sector and shift its export-led demand model to one based on greater domestic demand. India needs to develop its manufacturing sector in the same way that it has its services sector, to help create opportunities for its huge rural workforce.

In both countries the social tensions created by rapid industrialisation in rural societies are intense. There are serious demographic pressures. In both China and Russia political systems will be required to respond to the demands of a growing urban middle class.

Across the emerging world as a whole there is a massive issue of resource pressure – especially on basic commodities and oil. And the difficult question of how these economies manage their impact on the environment. And they also need to keep building on their impressive efforts to raise the skills of their workforce, as well as to develop wholly transparent legal and judicial systems on which effective intellectual property protection, for instance, depends.

So the challenges the emerging world faces are formidable. When you deal with policymakers in these economies there is no question that they take nothing for granted. So neither should we.

The consequences of interdependence

What about the bigger political and economic picture behind these changes. Well, the first thing I would say is that I don’t think the decoupling debate really tells us much. Obviously some emerging economies have continued to grow even in the absence of strong export demand from the developed countries. But that growth is still only a fraction of global demand. And the collapse of their export markets has had a strikingly consistent knock-on effect to emerging economy growth. We contract, they contract. Certainly the Chinese leadership see China's prospects as inseparable from Western market performance, as I confirmed in my discussions with Premier Wen last week.

This high level of integration and interdependence is of course why protectionism remains such a potential threat to the global recovery. And why anything that boosts trade has an important part to play in global recovery.

In that category I would put the G20 agreements on trade finance. The G20 global stimulus package, which was a significant political achievement. The G20 deals to expand IMF resources. I would also put a Doha world trade agreement if we could finally get it done. It’s a reminder that far from being a sideshow to this recession the G20 process is absolutely pivotal and the UK and Gordon Brown will be pressing for further advances in Pittsburgh next week.

The G20 itself is a concession to the change we’re seeing. Global governance is slowly catching up with economic reality. It’s already happened in the WTO, because the one-country one-vote structure in negotiations mean that India, China and Brazil punch their full weight.

But the rest of the international architecture is also going to have to adapt. The G8 is going to remain in some form, but we also need to recognise that the G8 alone is no longer enough for the coordination of global economic policy. China has made its support for an increase in IMF resources contingent on a greater Chinese role in its governance and the UK government has strongly backed a wider reform of the Fund to reflect the changed balance. The reshaping of the FSF into the Financial Stability Board has already done this, and is an important success.

There’s a huge imperative behind this process. It’s hard to imagine a new system of global financial regulation or economic governance that doesn’t have the buy-in of, for example, China and India and Brazil. Or a strong and credible outcome to the Copenhagen summit on climate change that doesn’t carry the emerging economies. Commodity and resource pressure, international migration, nuclear proliferation, African development. These are the problems that will define the next phase of globalisation and the emerging world has a decisive role – and a decisive stake - in their effective management.

Conclusion: the emerging world

So, to conclude. As I said in starting, zero sum thinking on this is going to get us nowhere. We have a huge amount to gain from the stable development of China, India and the other advanced developing countries. We have everything to gain from getting Sub Sahara Africa and the Gulf and North African states onto the same track. We have a huge amount to lose if that development stalls.

Whether you’re talking about the impact of the emerging economies on our industrial future, or the bigger political implications of the shift you come back to a basic point.

Which is: the rich world is not static through this change, socially or economically. Our economies are being hugely altered. Our companies are having to adapt. Global politics is being totally reshaped.

We’re not really talking about the emerging economies but an emerging world. The success and stability of that world is as much about our response to this change in the OECD as it is about the policies of the rising powers themselves.

Global Arab Network

This article is the speech of Business Secretary Lord Mandelson at The Economist’s Emerging Markets Summit.

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Last Updated on Thursday, 17 September 2009 21:30

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