A.T.Berdina

Doctoral student of DBA IBS

Kazakh Economic University named after T.Ryskulov

Key trends of global markets in the globalization and the integration of international economy

Summary

The global economy is characterized by such major trends as the new convergence, cyclical interdependence. The world will become more multipolar and interdependent in the future, as world markets offer opportunities for rapid economic progress.

The global economy is characterized by three major trends:

The first trend is the new convergence. In 1979 the late Nobel laureate economist Sir Arthur Lewis who studied the issues of development, said in his lecture: "In the last hundred years, the rate of growth of output in developing countries depended on the rate of growth of output in the developed countries. With high rates of growth in developed countries, growth rates are high and in the developing countries, and when growth rates are falling in developed countries, they are slowed down in developing countries as well. Whether is this link inevitable? ". According to recent data, despite the persistence of links, it is now important to distinguish long-term trends and cyclical changes. Since 1990s the growth rate of per capita income in emerging markets and developing countries rose steadily and significantly higher than the rate of growth in the advanced economies. This is an important structural shift in the dynamics of the world economy.

The second main feature of the world economy is cyclical interdependence. Despite the long-term trend growth detach in emerging markets and developing countries or their "detachment" from the advanced economies over the past 20 years, this has not led to undocking relative cyclical trend line.

New convergence and heightened interdependence coincide with the third trend, which is related to the distribution of income. In many countries increased inequality in income distribution and, in particular, the sharp increase in the proportion of people on the highest incomes. In the U.S., the share of 1 per cent of the population with the highest income more than tripled over the past three decades, so that it now accounts for about 20 percent of total U.S. income. At the same time, a reduction in the effect of the above convergence of the new distance between the advanced economies and developing countries, as they are considered as a group, the income of millions of people in the poorest countries of the world have remained almost unchanged for over a century. These two facts have increased the differences between the richest and poorest people in the world, despite the overall convergence of the average income.

A new era of convergence in the world economy began around 1990s, when the rate of growth in average per capita income in emerging markets and developing countries in general have been rising much faster than in developed economies. Typical of the world since the industrial revolution of the early XIX century, the sharp divide between rich countries and poor now softened. The main question is whether to continue this new convergence and will it lead to a radical restructuring of the world economy in about the next decade.

The Industrial Revolution and colonialism led to a huge discrepancy. Since the beginning of XIX century to the middle of the XX century, the gap in average per capita income between the richer and more industrialized North and the less developed South increased up from three - four times to 20 times or more. After World War II and the end of colonialism, this break decreased, but the gap in relative average income remained stable between 1950s and 1990s.

Over the past twenty years, however, the per capita income in emerging markets and developing countries grew almost three times faster than in developed economies, despite the crisis of 1997-1998 in Asia. Growth in the emerging markets has accelerated in the 1990s, and this was followed by accelerated growth in less developed countries at the turn of the centuries.

Trend growth detachment of emerging markets since 1990s and developing countries in the last decade is very striking. Much of this new convergence is explained by three phenomena.

First, globalization, through the firmly-established trade relations and increasing foreign direct investment contributes to catch-up in economic growth as the import and adaptation of know-how and technology to lag behind countries. Much easier to adapt the technology than to invent it.

Secondly, the demographic transition of most emerging market countries and many developing countries, which was accompanied by a slowing of population growth, raised the capital intensity of the economy and accelerated the rate of growth per capita. At the same time, in many of these countries it was the period of the golden age, when the ratio of the economically active population to the total population reached a peak. Meanwhile, the proportion of elderly people has increased significantly in the advanced economies, especially in Europe and Japan.

The third major cause of convergence served increase in the share of income invested in emerging markets and developing countries, 27.0 per cent of GDP over the last decade, compared with 20.5 percent in the advanced economies. Investment not only increases productivity, giving it more capital, it can also increase total factor productivity, the overall productivity of capital and labor, introducing new knowledge and technology, promoting a shift from low-productivity sectors such as agriculture, to the sectors with high performance, such as manufacturing, which accelerates catch-up growth. This third factor, the increase of the investment rate is particularly important in Asia, most notably in China, but not only there. Trend growth rates in Asia rose earlier and to a greater extent than in other emerging markets.

Will this convergence continue? Predictions are always risky, and some of the factors that led to a convergence in the last 20 years, may soon lose its value. Catch-up growth in the manufacturing industry to a large extent already happened, and reallocation of labor from low-productivity sectors of the industry with high performance as exhausted of their potential, and in some countries even high rates of growth of manufacturing have created few jobs, increasing the share of labor in activities with low productivity. However, we consider here the total convergence of emerging market and developing countries, in contrast to the analysis, where few countries as assigned equal weight to China, India or Indonesia. In general, at least for the next 10-15 years, there is significant potential for further catch-up growth.

Reallocation of labor from low-productivity sectors of the industry with high performance may be slower, but the redistribution of the firms from low productivity to high productivity firms even within narrowly defined subsectors likely to continue a very steady pace. Service, energy and infrastructure sectors can also have significant potential for the development of new technologies. Excluding China, the demographics will favor emerging markets and developing countries, compared to the "old" rich countries over the next decade or more. Finally, very high values of the debt accumulated by most of the advanced economies will limit their macroeconomic policies and deter investment.

Continuing even slowed somewhat convergence will lead to the global economy with a profound transformation. For years 2025-2030, per capita income in many emerging market countries are much closer to the income of the advanced economies, reflecting the differentials of growth and the likely real appreciation of their currencies. China's economy is sure to become the largest in the world, and the economy of Brazil and India will be much greater than the size of the economy of the United Kingdom and France. Very sharp division of the world into "developed" and "poor" countries, which began with the industrial revolution, will end, it will give way to a much more differentiated and multi-polar global economy. Once upon a time, especially in the beginning of the financial crisis in late 2007 and early 2008, it seemed that the pace of growth in emerging markets, particularly in Asia, will remain high, regardless of events in the U.S. and Europe. Then in late 2008 after the collapse of investment bank Lehman Brothers came panic. The dramatic decline in the rate of economic growth around the world, even in China, raised concerns that the crisis that began on Wall Street, will lead to a decline in the rate of growth in emerging markets and developing countries.

Indeed, in 2009, the growth in the world sharply slowed, with a reduction in the rate of per capita growth in emerging markets and developing countries to less than 1% and a decrease of nearly 4% in advanced economies. But the first recovered quickly, with growth rates of 6 percent in 2010, compared with 2.3 percent in the advanced economies. Stability of the first group during the crisis has led to new allegations of "different chances." Cyclic correlation observed particularly since the Asian crisis, 1997-1998, and is likely increased. Interdependence has also become more difficult to maintain the link between developing countries. Ups and downs in the countries - the largest importer of raw materials, such as China, immediately affect the commodity exports of many developing countries. In the global economy maintains interdependence, where business cycles are outside of their borders. In the emerging market and developing countries, growth rates are much higher than in developed economies, mainly due to supply-side factors, such as long-term capital accumulation, technological catch-up and demographics. However, the cyclical fluctuations relative to the trend largely associated with shorter-term demand factors are likely to be closely linked. The recent decline in the rate of growth of the world economy at the beginning of 2012, caused by a greater extent the problems of macroeconomic management and governance in the financial sector than the long-term factors on the supply side, clearly reflects this global interdependence. Apparently, there are three channels of cyclic interdependence.

The first channel is trade. As the share of trade in global economic activity grow, it can be expected the increase of changes in demand of any country stemming from macroeconomic changes. Impact of recession, for example, in one country spreads to other countries reducing the demand for exports of other countries. Theoretically, with the encouragement of trade further specialization of production, shocks in some sectors will usually reduce the cyclic interdependence, but in practice the macroeconomic impact of the demand is much stronger.

The second channel operates through more global, large and complex financial markets. In a new report of the IMF "secondary effects" of the impact of policies of one country to another as a result of the large volume of trade and financial ties in today's economy are measured and the importance of the financial channel is documented. On the example of the euro zone, the report committee concluded, according to which "direct" trade-related spillovers from tensions in the euro area, implementing the IMF program, will not be out of control, but if tensions raise doubts about the strength of banks in the euro zone, the secondary effects for the rest of the world will be significant in many cases, and they will not give way to Lehman even in the most serious consequences of bankruptcy. The report also says that in stressful financial conditions, for example, caused by the bursting "bubble" in asset prices or banks with over-leveraged, the correlation with the yield of long-term bonds is much stronger, indicating that the dependence of the strength of the financial channels on the general situation in the world financial markets. Changes in the structure of interest rates by maturity instruments, reflecting the similarity of monetary policy and financial market conditions, also affect the business cycle co-movement in the profitability of financial institutions and credit conditions. Finally, it seems, there is a third channel of interdependence, possibly closely related to the second, but less tangible in the form of confidence spread throughout the world, or "natural optimism", which has a significant impact on financial markets and investment decisions. News about the subprime market crisis in the U.S. appears to have directly affected the spreads on credit default swaps in emerging markets simply by the spread of "mood." For all these reasons, and due to the coexistence of detachment-term trends of growth and preservation of the correlation of cyclical changes in the world economy interweaving of global and regional factors into one cohesive whole.

Besides the general convergence of per capita income and the cyclic interdependence of economic activity in different countries, an increase in inequality between countries and the growing gap between the richest and poorest citizens of the world, apparently, is the difference between the highest and lowest income, it is the third type of primary trend. Gains were concentrated "at the top" in many countries. This evolution of income distribution in the country is complemented by the lack of growth in per capita income in the group of extremely poor countries who cannot accede to the above general convergence. Of course, the convergence of the rapid catch-up growth, which affects a large majority in the emerging market and developing countries, generates a rapidly growing global middle class. In this case, a variety of factors, including the nature of technological progress and the increasing premium for skills, the rapid expansion of the world market and the associated feature of many markets in which the "winner-take-all" capital mobility, in contrast to the relative immobility of labor, especially unskilled workers and reduces the influence of trade unions, led to increased concentration of income at the very top in many countries, both developed economies and emerging and developing countries.

Meanwhile, in some very poor countries, many of which suffer from conflicts and inefficiencies of government regulation, the real incomes of hundreds of millions of people a little higher than 200 years ago. In this sense, the new developed immense difference in the world economy, with both global and national issues have emerged. The distance between the poles of the income distribution in the world as a whole has increased.

In many countries, new reality was a sharp division of 1% of the population having the highest incomes, and the general population. Increase in the share accounted for by 1 percent of the population with the highest incomes, evident in the United States and some English-speaking countries and, to a lesser extent, in China and India. However, according to the available data, it is unclear whether this hyper-concentration is at the top as truly global phenomenon. According to World Top Income database, at least until 2007, in continental Europe and Japan have been similar shifts of income to the top of the income distribution. But as the concentration of the reasons is mostly global in nature and can only be partially offset by the economic policy of the country is likely that the concentration at the highest level will only increase. Salary of managers in countries such as Germany and the Netherlands, for example, has rapidly increased in the last decade. The crisis in the euro area, accompanied by a policy of austerity is likely to lead to greater inequality in Europe as the containment of social expenditure budget constraints, while the mobility of capital and skilled labor force make it difficult to actually raise taxes on the wealthiest.

These new discrepancies in the distribution of income do not always imply an increase in inequality in the country. However, they reflect the concentration of income and, through income potential political influence at the top, which could lead to further increase of the concentration of income. Technological, fiscal, financial, and political factors, which have created this momentum, will continue to operate.

The future of the world economy will largely depend on the interaction between the convergence of the average income in the country, the growing interdependence of different countries and the growing gap between the upper and lower "tails" of the distribution of income within countries and for the world population as a whole. These trends imply political, social and geo-strategic implications of which will depend on the economic policy debate in the future. For example, the growing importance of emerging markets and developing countries should be reflected in the governance structure of international organizations where their legitimacy and effectiveness depend on. Global interdependence requires the strengthening of the institutional framework of cooperation, reflecting the growing importance of emerging markets and developing countries. Secondly, the above described the global economic cycle and secondary effects, recently documented by the IMF require the coordination of macroeconomic policies. Finally, the potentially destabilizing trends in income distribution require the same international policy coordination, without which it would be difficult to pursue a policy of redistribution in the same country. The requirements are harmonization, at least to some extent, without tax bases and tax rates, minimizing the opportunities to reduce tax liabilities and the management of migration policies in the interests, as the host country and the country of origin. Finally, to assist the poorest countries is a moral and political necessity.

The world will become more multipolar and interdependent in the future, as world markets offer opportunities for rapid economic progress. Realization of this potential will depend on how international cooperation will increase the effectiveness of macroeconomic policies of countries, given the secondary effects, and to what extent it will encourage a more equitable balance and fairness in sharing the fruits of economic growth.