Economic world links with the East

Here's something that will not come as particularly fresh news to local readers in the Middle East, but which perhaps has profound repurcussions for those in the West. Ben Simpfendorfer, who specialises in Arab-Chinese relations, has just published a substantial note for RBS clients. Title: 'The New Silk Road, A shift in the world's centre of economic gravity'.

The research is based on Simpfendorfer's book of the same name, published last year, but it seems significant that RBS is now promoting the concept to its broad client base. The financial world's attention is clearly shifting, along with the centre of economic gravity.

Here's how Simpfendorfer introduces his topic:

"The rise of the East has captured the world's attention over the past decade. The economic crisis has only hardened views of global rebalancing. Whether it is China's share of the global economy, or the Middle East's sovereign wealth funds, there is a sense that the world's centre of economic gravity is shifting further east. Yet, if the last decade was about the rise of the East, then the next decade will be about the linkages within the East. Take, for instance, Chinese exporters who are looking to Egypt and Indonesia in response to sluggish European demand or Saudi Arabian oil producers who are turning to China and India as the United States' oil consumption flattens.

"It is the idea of a 'new Silk Road' that best describes the changes taking place. The new Silk Road is a group of countries that are bound together by history, geography and culture. It is a region that stretches from North Asia to North Africa, includes 61 per cent of the world's population, and accounts for 33 per cent of the world's economy. It is a group of countries that have historically accounted for much of the world's trade.

"The idea of a new Silk Road emphasises economic linkages, not just relative gross domestic product (GDP) growth rates. So, even if China's fiscal stimulus spending slows, Chinese railway companies can still make money building railways in Saudi Arabia. Or, if India's economy falters, Indian iron ore producers will still find a market selling iron ore to China. It is also emphasises the risks of stronger linkages. So, if China's economy was to collapse as a result of a housing price bubble or if Saudi Arabia's oil supplies were disrupted as a result of an attack, the implications would be felt throughout the rest of the region. The region's interdependencies thus create new challenges for its policymakers."

Simpfendorfer's definition of the Silk Road includes emerging economies bound together by history, culture, geography and trade – East Asia, Central Asia, South Asia, the Middle East, along with North Africa because of its Arab and Muslim heritage. On RBS forecasts, this region's growth rates will outstrip those of developed economies for the next decade, boosting the region's share of the global economy from 33 per cent now to 46 per cent in 2020.

The new Silk Road accounts for 61 per cent of the world's population, with 11 countries in the region boasting populations that are larger than either France of the UK. Demographic changes will therefore have major implications for the global economy, notably:

Rising urbanisation: On United Nations estimates, almost one billion additional people in new Silk Road economies will live in urban areas by 2030. That means massive demand for housing and infrastructure.

Strengthening private consumption: Consumption across the region is rising rapidly. That inevitably means exponential growth of local domestic markets.

The world's supplier: Says Simpfendorfer: "The new Silk Road accounts for much of the world's oil and consumer goods supply. Intra-regional trade is also growing, but so will the region's trade disputes."

A major new trade bloc: Quite logically, the desire to settle transactions in Chinese yuan or, alternatively, euros, will grow; US-dollar pegs are likely to be abandoned in favour of currency-basket arrangements.

Oil remains key: Countries lining the new Silk Road will account for 75 per cent of every extra barrel of oil consumed or produced in the next decade.

But there also important challenges, most notably finding enough food and water in the region to supply a demanding population that is rapidly becoming more affluent.

- The author is Associate Editor with The Financial Times. The views expressed are his own


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