Living in a multi-polar world economy

Although many millions of people in the lowest income countries have suffered greatly from the world recession, for many emerging countries growth has continued apace and the world economy is more resilient than the consensus view believes. This was one of the arguments explored by Jim O'Neill, Head of Global Economics, Commodities and Strategy Research for Goldman Sachs, in his talk to the 40th Anniversary meeting of the Keynes Society last night. The creator of the BRIC acronym was also quite bullish about prospects for the UK economy, with Britain able to take advantage of a competitive exchange rate and a strong rebound in global economic activity driven forward by fast growth in emerging market countries.

One of the key changes in the world economy has been the surge in domestic demand growth in emerging countries. Domestic demand (made up of consumption + government spending + capital investment) contracted by 3.4% in the advanced nations in 2009 whereas it expanded by 13% in China last year. And, whilst there are fears that the Chinese economy will over-heat and experience the bursting of it's own financial bubble, policy-makers in Beijing are already prepared to tighten policy through higher interest rates, releasing the remnimbi to appreciate against the US dollar and increasing reserve asset ratios.

Much of the talk focused on the remarkable change in the size of emerging market economies.

In the last decade, the increase in the dollar value of Chinese GDP is seven times the change in Japanese GDP. Similar fast growth rates in BRIC nations and the Next-11 tell us that the world economy has more than one driver of demand and growth.

Emerging markets are providing a turbo boost for the global economy and this provides huge opportunities - from Italian companies selling luxury goods to newly rich consumers in China to Tesco's plans (within five years) to have more stores in China than it does in the UK. (The supermarket chain is planning to open in 80 shopping centres that it is developing in China by 2016).

China's switch towards domestically-generated growth with a higher share of consumption in their GDP will help to address some of the structural trade imbalances that have been a long-running sore in relationships between China and the US and some other countries. A renewed appreciation of the Remnimbi will also help this process.

A recent video interview with Jim O'Neill can be found here And here is a recent article from the Guardian on the political pressures for China to allow their currency to appreciate against the US dollar.