x Abu Dhabi, UAEWednesday 26 July 2017

The waning of US power spells shift in old relationships

A recent US assessment about waning American power by 2025 makes for uncomfortable reading.

A recent US assessment about waning American power by 2025 makes for uncomfortable reading and seems to underline the long-term structural shifts in the world economy to Asia. Current western economy recessions are reinforcing that something different has to arise from the ruins of the recent financial and credit crises. While all seem to agree that we are heading into some kind of global slowdown, we also seem to intuitively know that overall demand will be sustained by the BRIC economies - Brazil, Russia, India and China - to one degree or another in the future.

Crucially, we do not know whether strong continuing demand in Asia will in a sense "rescue" the old developed world by sustaining demand, or whether by keeping up - albeit at reduced levels - the prices of energy and raw materials, will actually increase the problems that the developed world already faces. The reason is assessing and agreeing on whether the shift to Asia is cyclical or structural, and even here the US intelligence assessment is somewhat cautious for the BRIC economies. We can see that this cycle will be different from previous economic cycles because of the structural shift of economic power to Asia, but we tend to focus less on the long-term effects of that shift in terms of where the new sustained economic demand will come from. According to a recent Goldman Sachs report, this will come from a booming middle class in the BRIC economies.

According to Goldman, this is bigger than the growth of the middle class in the 19th century - growth that changed the face of Europe and then North America - for within a quarter of a century there could be another two billion people, most of them in Asia, leading a middle-class lifestyle. For the Gulf, which is expanding its manufacturing and service sectors, demand for its products will undoubtedly come from the BRICs and not from current trading partners. The forecast figures for these structural changes are astounding.

China is now racing up the league of total GDP and about to pass Germany, perhaps next year. China will have shot past the US some time around 2025, with India close behind. By 2025, the economies of Brazil, Russia, Indonesia and Mexico will all be larger than the UK, while Japan, France and Germany will have smaller economies than Turkey. These forecasts might seem a bit far-fetched, but there is some consolation for the tired old western economies from the wealth per capita forecasts. If we are to believe the reports, the US and UK head the table now and also in 2050, with the UK rather surprisingly passing the US as the richest country in the world per capita by 2030.

Given the size of accumulated British government debt for the various financial bailouts and the future tax burden on UK citizens, this might not materialise as projected. Other members of the old developed world follow along, but the gap in wealth per head between the "old rich" and the "new rich" will be much smaller then than it is now. To put that in perspective, the Chinese will in another 40 years or so have a standard of living that is about the same as - maybe even a bit higher than - that of the UK. Indians will have a standard of living about the same as Italians now.

The report makes some crucial assumptions which might not materialise as forecast. First, it assumes that the majority of the 2 billion or so members of the new middle class will come from Asia and the BRICs, while the developed economies will not keep pace. Second, it does not specify what constitutes the middle class of the future in terms of purchasing power, given differences in inflation. Goldman reckons that some 35 per cent of the population of China now qualifies, and that this will rise to 70 per cent by 2020. India is running about 10 years behind China, with only about 5 per cent today and the Goldman report reckons that by 2040 the vast majority of Indians will count as middle class.

If this is true, it will have profound implications for some Gulf countries that are today relying on Asian manpower to sustain their construction-led economic growth. But this sort of analysis does raise a number of objections. One is that it is too linear - that it assumes that what is happening will continue to happen. That leads to the second objection: that something new, maybe environmental pressure, will render these outcomes unattainable. This is probably a more realistic objection and one that we saw put into effect when China was forced to virtually suspend a lot of its manufacturing output during the Olympic Games because of chronic pollution emissions.

Increasingly the world will be run by a new middle class, largely in Asia, and this trend - despite environmental objections and pressure on natural resources - seems to be irreversible. The sense of palpable fear around the world over ever-gloomy forecasts of economic slowdown in the West has only been heightened by fears that China, the grudgingly acknowledged saviour of international trade, is also slowing down.

The issue is how the developed world accepts their new diminished economic role in the world without a confrontation with the new rich. This is at the heart of the recent US intelligence assessment report. The resource-rich Gulf economies will be caught between existing alliances and economic bonds with the West, and the emerging Asian and BRIC realities. How they manage these structural changes without being sucked into new geopolitical conflicts will be the litmus test of their leaderships.

Dr Mohamed A Ramady, a former banker, is a visiting associate professor in the finance and economics department at King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia.