Greater global integration of peoples, economies, and leadership, is the only solution to the socio-political crisis and the coming global reconfiguration

The result, as so often before, was a sharp devaluation of the speculative assets – the bursting of the bubble – when the risks involved with those assets, in this case the risks involved in deriving complex investment vehicles from mortgages offered to homeowners who could not afford to make required payments for the full term of the loan, became evident.  Both the holders of those assets (investment banks, hedge funds, and mortgage companies), and even more, those who had written insurance against losses on those assets, then faced bankruptcy.

As with the Latin American, Asian, and dot-com crises, timely and large-scale government actions to revive demand and restore confidence, along with the write-down and disposal of bad debts (which has yet to come, and will be painful) will eventually get us past this crisis.  But the real question as to what will come next must focus on the future of economic growth, rather than on this crisis.  Where will growth come from, and is the global financial and political structure going to be supportive, or an obstacle, to this growth?

A New World, with New Centers of Growth

For the second half of the 20th century, a simple pattern drove global growth: raw materials from the developing world were manufactured to provide consumption goods for richer countries.  The locus of much of this manufacturing shifted, from the developed world itself to many locations in the developing world; but the basic pattern remained the same.  Services in the developed world also expanded, taking up the space left as manufacturing jobs moved out.

Those countries that tried to work against this trend – such as Latin American countries that tried to manufacture mainly for their own developing economies (known as ‘import substitution), or Asian developing countries that overinvested in leisure and service and commercial construction – suffered for it.  The trend was overwhelming. 

Yet it could not last forever.   As the capacity of the developing world to produce goods and services grew, the developing world, especially the US, could not continue to purchase it all.  It was an effort to prolong this pattern, with Chinese savings being lent to American consumers to buy products manufactured in China and in other developing nations, that led to the excess borrowing and speculation that underlay the current global crisis.   When the bubble of borrowing burst, the sudden halt in American credit and spending devastated not only developing-world producers, but also all the other elements in the global chain of production, including the suppliers of intermediate manufacturing and construction machinery (Germany and Japan) and of raw materials (Russia), and the suppliers of finance for production and trade (many US and international banks) as well as consumer finance.

What the current crisis does signal is a shift in the future center of global consumption growth.  To sustain global growth, the pattern of the last fifty years now must change – global natural resources and manufacturing will no longer go mainly to fuel consumption in rich countries, but to meet the growing demands for consumption gains in developing countries.

The inevitability of this can be seen in the following charts.   From 1950 to 2000, the proportion of global population in Europe and the US has been shrinking; it will shrink even further in the next 50 years.  But even more striking is the decline in the proportion of the global economy (GDP) produced in Europe and the U.S., and the future decline in the proportion of total economic growth that will occur in the developed countries (see graphs 1,2,3).
From 1950 to 2000, the labor force in Europe and the US grew dramatically as a result of their post-World War II ‘baby boom;’ these countries also experienced a huge increase in university education that dramatically increased the productivity of their work force.  The same was true in Japan, Taiwan, and South Korea.  These trends supported rapid increases in output and consumption. Yet these trends are now over.  In the next fifty years, labor force growth in the US will slow dramatically, and in Europe, Japan, and Korea, the labor force has already started to decline. Under current projections, Europe’s labor force in 2050 is expected to be no greater than it was in 1950.  This is a dramatic reversal of the trends that have dominated the global economy for the last 50 years.

By contrast the developing world is poised for continued rapid labor force growth, a vast increase in secondary and tertiary education, and a major increase in urbanization.  All of these trends should boost output and consumption.  Since the population of the developing world is already much larger than that of the rich world, these trends will combine to divert the great majority of the economic growth in the next four decades to the developing world (See Chart 3).

In sum, the world in the next forty years will feature an aging, slow-growing US/Europe/Japan, and a fast-growing, increasingly educated, urban, and youthful rest of the world.   This is a major change from prior patterns, and poses major challenges for maintaining a peaceful world order.

Risks and Opportunities in a Developing-world centered global economy

The obvious risks in the new world ahead are that global political and economic institutions will not adapt to, or will even actively resist, the new pattern of orienting global growth to satisfying growing consumption demands in developing countries.  Several major changes will be needed for successful adaptation:

(1)    Manufacturing and service firms will need to recognize that as the US, Japan, and Europe become mature, aging markets, the most rapid growth for their output will come from providing goods and services that are demanded in the developing countries.  But such firms cannot simply sell the goods they make for developed markets to new consumers.  As successful global firms such as McDonalds and Mittal have learned, they will have to adapt their products to be successful in emerging markets.

In particular, products and services for emerging markets will have to be designed and manufactured and marketed in ways that respect and work within the cultures of developing countries; use green low-energy and efficient manufacturing processes (otherwise increasing output to desired volumes will be too costly); and create products that are simple and inexpensive enough for consumers in developing countries to purchase and maintain.  While there will still be a growing market for luxury cars and jet aircraft in China, India, and Brazil, the truly vast gains in market share and profits will go to firms that can create lightweight solar-powered vehicles, hyper-efficient home heating, cooling, lighting, cleaning, and refrigeration products, and low-cost green building materials.  Similarly, while there will still be a market (even a much larger market) for foreign students to pay for world-class educations in American and European universities, the real gains in global education will likely come from efforts by American and European universities to contribute to developing world-class universities and technical colleges in developing countries, and from finding more efficient ways to teach millions of schoolchildren skills from basic maths and literacy to advanced technical, engineering, and professional skills.

(2)    Given the aging and shrinking workforces in rich nations, those nations will have to recruit heavily from abroad to fill a variety of entry-level and skilled positions in their economies.  Such foreign recruits will be especially crucial to firms seeking to re-orient their production and marketing to developing countries.  American and European firms will have to further extend their foreign investment into partnerships, design centers, manufacturing, and service and support centers in developing countries.  Even “European” and “American” firms will likely end up, two or three decades from now, with a majority of their employees either working in, or drawn from, non-US and non-European societies.
This means that international migration will have to be greatly facilitated to meet the demand for labor in richer countries, while providing social integration of migrants   and their families.

(3)    A huge investment will be required to shift global infrastructure, which is now aimed at moving goods to and within developed societies, to create the means to move resources and finished goods and services to and within developing societies.  Ports, roads, railways, airports, bridges, tunnels, etc. will need to be built to serve emerging societies.

(4)    The energy to power growing developing world consumption will have to be supplied in ways that are clean and efficient.  This is not only because of global warming, but simply to avoid choking developing world populations on emissions wastes.  The size of cities and the population concentrations in the developing world will dwarf anything in the land-rich Americas and exceed that in Europe.  Simply to provide clean air and water for these cities to survive, they will have to find different means of satisfying consumer needs than the capital and energy intensive methods used in the 20th century by richer nations.  Japanese models, not American, may be most helpful.

(5)    Global financial and trade regulations will have to find ways to peacefully adjudicate inevitable conflicts between finance, manufacturing, and retailing firms and partnerships that span continents and different cultures.  The WTO and IMF are excellent starts, but are currently troubled by a lack of global cooperation and fairness.  The time when richer countries could dictate terms in the belief that developed countries depended on their capital and expertise are fading; it is the rapidly growing markets of the developing countries that will be more deeply needed by the aging and stagnant societies of the developed world.  This means that developing countries will have to play a much larger role in international financial and trade institutions.  The replacement of the G-8 by the G-20 that has occurred in the wake of the current crisis is the necessary first step in this process.  But that is an informal step; the same expansion needs to occur in all formal global institutions.

(6)    The vast expansion of market activity in the developing world, increased flows of raw materials, finished goods, and labor, all will greatly increase the opportunities for transnational crime and corruption to flourish.  If international markets are to become efficient, and not be undermined by corruption and crime, international cooperation on law enforcement will have to step up as well.  This means the adoption of more uniform international legal norms and extradition agreements, and that joint training and common actions by police and other law-enforcement agencies and professionals will have to outpace the growth of international exchange.

Unfortunately, none of these steps will be easy.  Indeed, all will provoke opposition.  Yet the gains from enabling this re-orientation of the global economy are enormous. The consumption growth in the developed world will provide a huge market for goods and services that will sustain job growth in the developed world as well.  Competition and technical improvements involved in meeting those demands will raise the quality of goods and services and choices for consumers world-wide.  But even more important, one must consider the consequences if this greater globalization is resisted.

First, if richer countries seek to lock out immigrants and wall off their economies from the developing world, they will likely bankrupt themselves.  By 2050, all of today’s rich economies will have 25-40% of their populations over 60 years old.  This is an unprecedented situation in human history.  These countries will simply not have enough prime age workers to pay for the pensions and health care of their elderly populations, and to also educate and support their youth from childhood through college.  They will desperately need young workers to care for the elderly and to provide the cleaning, personal services, and innovative and entrepreneurial roles vital to keep an economy from simply stagnating and decaying.  Even if older workers are kept productive and on the job, they will not all be able to collect expected senior-level salaries, they will not be as inventive and entrepreneurial as younger workers, and they will absorb heavy health-care costs – joint and cornea replacements, drugs and surgeries for heart, cancer, lung, liver, and other ailments of aging and lifestyle problems – to remain active.

Without a surge of young, highly motivated, relative inexpensive, but highly and recently trained workers, today’s rich societies will likely to go bankrupt from placing the burden of expensive pension and health care for very old societies on slow-growing, even stagnant, economies.
Second, if young workers in the developing world are not given access to jobs (either through migration to richer countries or through the rapid increase of foreign and domestic investment at home), these young populations are likely to fuel radical political movements and violent conflicts. These acts will undermine the appeal of globalization, and damage growth prospects in their own countries.  That will in turn undermine global growth potential as well.

Third, the inevitable gravitational pull of growing markets and huge youthful populations in developing countries, in close proximity to richer but aging populations in richer ones, means that if legal migration is not facilitated, the pressures for illegal migration will become overwhelming.  Efforts to close borders and stop flows of legal capital and labor will simply lead to exploding illegal movement of people, resources, and funds, overwhelming law enforcement and creating the equivalent of the United States’ experience with 1920s prohibition – the era of gangsters and Al Capone – on a global scale.  It should be clear to everyone that this is already underway, as trafficking of people, drugs, and contraband of all kinds has become one of the world’s fastest growing businesses.

Solutions: Global Networks, Global order based on Global Cooperation and Trust-Building
While it is clear that the formal institutions of global governance and finance – the United Nations, the World Bank, the IMF, the WTO, and others – are too slanted toward the influence of the rich late 20th century countries, and need to adapt to provide more input and influence from the emerging demographic and economic powers of the world, I want to emphasize the need for increased informal institutions and cooperation across the North-South divide.

The greatest obstacles to the next phase of global economic growth are the mistrust and misunderstanding that divide nations and people.  At the moment, Russia and Central Asia are mistrustful of the U.S. and NATO countries; India is mistrustful of China and of Pakistan; the Gulf countries are anxious about Iran; Turkey is concerned about Europe and America; and many European countries have growing anti-immigrant and anti-globalization parties.

In the business world, great progress has been made.  But among politicians and political parties, a great deal of progress remains to be undertaken.  In part, this is the result of two grave errors.  After the end of the Cold War, western countries assumed too easily that they would dominate the world even more than before, and that developing countries would have to adapt to or and follow western institutions for their own growth.  This was simply wrong; what was needed was a rebalancing of the world’s economic and financial relations to accommodate a future of dominant growth in the developing world.  This task thus remains, and is more urgent than ever.  Second, al-Qaeda’s attack on the United States, and the U.S. military response, amplified fear and cleavages among developing nations and the West, fears that have entered debates on immigration, trade, education, and arms control, among other areas.

Both the al-Qaeda attack and the U.S. response have resulted in thousands of deaths, and have not resolved the problems of Muslim/Western relations.  Al-Qaeda stands firmly against the cooperation and global integration of western and Muslim peoples and nations, and has been willing to kill thousands of Westerners, and many more thousands of Muslims, in futile attempts to remove all Western influence, and governments willing to deal with the West, in Muslim nations.  U.S. actions under the Bush administration, often misinformed and misdirected, often did give Muslim peoples reason to be mistrustful of the U.S.  However, I believe the new Obama administration in the United States is resolved to change its approach to focus on supporting the peoples of Iraq and Afghanistan to resist violence against their populations, and to manage their own affairs with a greatly reduced U.S. role.  Obama has promised to extend an open hand and friendship to all nations, and asked their help in meeting the coming global challenges.

These challenges are two:  We must overcome the fear and distrust across nations and civilizations that have arisen from the current wars involving Muslim and Western societies; and from other wars such as those between Israel and Palestine, India and Pakistan, or in Central and West Africa, that have left scars, anxieties, and displaced peoples.   We must also overcome the fears that have arisen from the current fiscal crisis.  For the latter, we must recognize that the next episode of global growth depends on uniting the youth and growth opportunities of the developing world with the experience, technology, and capital of the developed countries.  Without each other, both with fail; only with each other can both succeed.
However, for this global integration to move forward, efforts need to be made at three distinct levels.  First, international bodies and organizations must develop the means to share global burdens and solve global problems in an increasingly multi-polar world.  At present, we have an enormous variety of international organizations.  Some are global and issue-based, such as the WTO for trade, the UN Climate Convention for global warming, or the Council of Europe for human rights.  Others are regional and security-based, such as the OSCE, OAS, AU, Shanghai Group, etc.  It would be a dreadful error if regional organizations continue to be the focus of international security coordination.  Global peace is more readily maintained in a unipolar or bipolar world, where one or two powers balance each other.  In a multi-polar world, where no powers can dominate the whole, security concerns tend to operate by leading each major power to build a coalition with other powers.  Unfortunately, the security dilemma in a multi-polar world operates to make each power perceive an alliance of others as a threat to its own security.  The result is that competing alliances develop, dividing the world into confrontational groups and increasing the risks of international war.

Moreover, the major flows of workers and capital will not be within the traditional regions of Europe, the Middle East, Asia, and Latin America, but across all of these regions.  In particular, the need to integrate experienced, capital-rich, but aging regions with the labor of youthful, fast-growing, developing regions will mean that the integration that is needed is between North and South America, between Europe and Africa, between East Asia and the Middle East.  Current regional organizations work against these axes of integration, not with them.   There is thus a vital need for truly global, cross-regional organizations to develop to help regulate and coordinate responses to global integration and security issues.    Whether this arises from a remodeling of the United Nations, or an expansion of the OSCE, or from a merging of regional organizations, some organizational framework must emerge that is appropriate for the emerging multi-polar world.  This organization would have to include all nations (or regional alliances) that represent a minimum of 3% of the world’s population or economic output on a fairly equal basis; and its goal would be to prevent regional blocs or alliances from dominating future global relations.

If the first requirement is a new global architecture, the second is a shift in national orientations to recognize the critical need for global integration across regions, and to integrate various peoples within nations.  This means increased attention to the issues of human mobility discussed by Bruson McKinley’s group in this Forum.   In the future, with economic growth centered in the developing countries, and labor forces aging and shrinking in the developed world, the healthy circulation of people will far transcend the current levels of labor migration.  Both developing and developed nations must therefore prepare for a much smoother integration of migrants and workers, who will be present on far larger scales than today, as essential for their economic as well as political well-being.

Finally, and perhaps most important, the third change must occur at the level of individuals, civic associations, and NGOs, which must work to achieve cross-cultural understanding based on mutual respect for diverse nationalities, ethnicities, and religions. A world in which communication and negotiation is based on each group perceiving migrants, foreign cultures, and national interests as pitting “us” against “the others” will not support the needed shift in national orientations and international organizations.  Instead, there must emerge a widespread recognition of a common set of human interests, which transcend and are reflected through multiple cultural lenses, as the basis for global interactions.
Those of us who grasp this essential truth must therefore make use of forums like the WPF and dialogue of civilizations to overcome mistrust and misunderstanding, and to focus attention on shared interests, common opportunities, and global goals.  This does not mean we should not recognize the major differences in our cultures, our values, and the organization of our societies.  Rather, we need to learn not to see such differences as threats, and to learn ways to accommodate differences while preventing them from becoming obstacles to the free movements of people, ideas, capital, and goods and services to the people and places where they are needed, and can best prosper.

I do not mean to minimize these enormous problems.  People of good will have struggled with issues of integrating immigrants and managing schooling and citizenship for people with vastly different cultures.  Efforts to limit the incidence and damage of war have not succeeded wholly even after thousands of years.  Yet solving these problems is made more difficult where people do not recognize the degree to which they depend on each other for future prosperity.   In the world ahead no nation – not the U.S., not the E.U., not China, not India – will be able to prosper without increased trade, migration, and capital flows across nations.  That must be our starting point.