In recent months, virtually everybody around the globe has become aware of the sovereign debt crisis in Europe. Unfortunately, a crisis often means that the problem was, in fact, known and anticipated to some degree but less understood by the public.
The current sovereign debt crisis masks a complex long-term problem for Europe. Europe has been in decline for some time. Indeed, Europe lost its global share of output (GDP) faster than any other region of the world during the last three decades. Therefore, the recent sovereign debt crisis ought to have been anticipated since most European countries were already spending far more than could be justified by their current and estimated future growth rates.
The rise of emerging markets endowed with young and growing populations will, therefore, tend to displace aging European countries overtime. Although technology has increased productivity per capita, it has not been sufficient to replace an aging population in Europe. In any case, technology cuts both ways. Emerging markets are adopting new technologies almost as fast as Europeans and Americans.
Indeed, by mid-2050, there will likely be no Western European country in the list of “the top ten economies of the world.” Germany may be able to hang on but an accelerated decline of other Euro area countries is already weighing heavily on Germany’s fiscal outlook. Long considered the engine of Europe, Germany may be pulling hard but the effort is being negated by Euro area countries with punctured tires. Germany is unlikely to hold on to the top ten and will be surpassed by emerging markets such as Indonesia and Mexico.
It will be a remarkable remake of the G-8 and G-20. Currently, the G-8 includes France, Germany, Italy, and the United Kingdom. They are unlikely to be in the top ten by mid-2050. New faces are already emerging to replace these aging European countries. Almost everybody is familiar with the rise of China and India because they account for about 35% of the global population and have received extensive media attention and coverage.
However, fewer people know about countries like Indonesia and many others in Latin America, Asia, and Africa/Middle East that do not receive the media coverage lavished on China and India.
The major point is that while technology is, indeed, important for growth, it is just as important to have a growing population that is capable of harnessing new technologies to increase productivity per capita. It is a dynamic that is difficult to define in policy terms and, therefore, political and policy leaders rarely know what to do in this regard. As a result, heavy-handed policy interventions like the one-child policy in China or proposed taxes/banking regulations in Europe and US tend to create more problems than solutions. China’s rise will be dealt a serious challenge by 2030 when it begins to deal with an aging population much sooner than if a more accommodating policy had been adopted. However, it is also true that China’s rise would have been delayed if more children had been born and were living in absolute poverty.
This largely unappreciated dynamic combination between population and technology will help to preserve the United States as a global power beyond 2050. This is not to say that US policy planners are superior forecasters relative to Europeans or other policy makers. However, America’s ability to attract some of the best immigrants from around the world has been extremely helpful. The legacy of having had a relatively open immigration policy in the past has helped to rejuvenate the US economy and its demographics. This clearly suggests that heavy-handed policy interventions and regulations should not be the way to go in the future. Open economies perform better than closed societies over the long-term.
Nonetheless, as Europe slowly falls behind, new and unfamiliar faces are joining the US in the top ten. Russia and Japan may hang on up to 2050 but America’s friend to the North – Canada – will also drop from the top ten. The US will have to adjust to the disappearance of familiar “friends” at the top. Indeed, the US will not be the dominant economy in mid-2050. It will drop from first to third. Its own success will hinge on how it responds to these changing events. Even other emerging markets like South Africa – currently a member of BRICS (Brazil, Russia, India, China, and South Africa) – will not be in the top twenty by mid-2050. Nigeria and Kenya will emerge to replace it.
Major questions loom for the US as Europe continues its decline. Will the US continue to be an open economy or will it view unfamiliar emerging markets as a threat to its own economy? Will protectionism and barriers to trade increase or will the US see emerging markets as an opportunity to trade the globe? The impending changes over the next several decades will stage a remarkable turn of events. In general, Europeans – including Americans since most of the population is of European ancestry – have been at the forefront of global dominance for over 500 years. This dominance goes back to the rise of Portugal and Spain within the realm of international affairs circa 1500 AD. It will be a new world not dominated by the “West.”
Sylvester is a Merchant Banker & Hedge Fund Manager educated in both the United States and Nairobi, Kenya.