The Changing Demographics of the Global Economy

Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the global economy over the past 30 years or so. As late as the 1960s, four stylized facts described the demographics of the global economy. The first was US dominance in the world economy and world trade picture. The second was US dominance in world foreign direct investment. Related to this, the third fact was the dominance of large, multinational US firms on the international business scene. The fourth was that roughly half the globe--the centrally planned economies of the Communist world--was off-limits to Western international businesses. As will be explained below, all four of these qualities either have changed or are now changing rapidly.

The Changing World Output and World Trade Picture

In the early 1960s, the United States was still by far the world's dominant industrial power. In 1963, for example, the United States accounted for 40.3 percent of world output. By 1996, the United States accounted for only 20.8 percent (see Table 1.2). Nor was the United States the only developed nation to see its relative standing slip.

Table 1.2

The Changing Pattern of World Output and Trade

Source: Export data from World Trade Organization, International Trade Trends and Statistics, 1996. World Output data from CIA Factbook, 1996 (1995 world output figures are estimates).

	Country	Share of World Output, 1963 **	Share of World Output, 1996	Share of World Exports, 1997***
	United States	40.3%	20.8%	12.6%
	Japan	5.5%	8.3%	7.76%
	Germany*	9.7%	4.8%	9.9%
	France	6.3%	3.5%	5.46%
	United Kingdom	6.5%	3.2%	4.94%
	Italy	3.4%	3.2%	4.76%
	Canada	3%	1.7%	3.81%
	China§	NA	11.3%	2.85%
	South Korea	NA	1.7%	2.45%

* 1963 figure for Germany refers to the former West Germany.

** Output is measured by gross national product.

*** The 1997 estimates are based on purchasing power parity (PPP) statistics that adjust GNP for differences in prices (the cost of living) between countries.

^§ The Chinese figures are somewhat suspect. When calculated using unadjusted GNP data, China's share of world output shrinks to 3.1%. Thus, China's high share of world output on a PPP basis is partly due to the relatively low cost of living in China.

The same occurred to Germany, France, and the United Kingdom, all nations that were among the first to industrialize. This decline in the US position was not an absolute decline, since the US economy grew at a relatively robust average annual rate of close to 3.0 percent in the 1963 - 96 time period (the economies of Germany, France, and the United Kingdom also grew over the time period). Rather, it was a relative decline, reflecting the faster economic growth of several other economies, particularly in Asia. For example, as can be seen from Table 1.2, over the 1963 - 96 time period, Japan's share of world output increased from 5.5 percent to 8.3 percent. Other countries that markedly increased their share of world output included China, Thailand, Malaysia, Taiwan, and South Korea. By virtue of its huge population and rapid industrialization, China in particular is emerging as an economic colossus.

The Changing Foreign Direct Investment Picture

Reflecting the relative decline in US dominance, by the end of the 1980s, its position as the world's leading exporter was threatened. Over the past thirty years, US dominance in export markets has waned as Japan, Germany, and a number of newly industrialized countries such as South Korea and China have taken a larger share of world exports. During the 1960s, the United States routinely accounted for 20 percent of world exports of manufactured goods. Table 1.2 also reports manufacturing exports as a percentage of the world total in 1997. As can be seen, the US share of world exports of manufactured goods had slipped to 12.6 percent by 1997. But despite the fall, the United States still remained the world's largest exporter, ahead of Germany and Japan.

In 1997 and 1998 the dynamic economies of the Asian Pacific region were hit by a serious financial crisis that threatened to slow their economic growth rates for several years. Despite this, their powerful growth may continue over the long run, as will that of several other important emerging economies in Latin America (e.g., Brazil) and Eastern Europe (e.g., Poland). Thus, a further relative decline in the share of world output and world exports accounted for by the United States and other long-established developed nations seems likely. By itself, this is not a bad thing. The relative decline of the United States reflects the growing economic development and industrialization of the world economy, as opposed to any absolute decline in the health of the US economy, which in the late 1990s was stronger than it had ever been.

Notwithstanding the financial crisis that is gripping some Asian economies, if we look 20 years into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, South Korea, and Brazil, and a commensurate decline in the share enjoyed by rich industrialized countries such as Britain, Germany, Japan, and the United States. The World Bank, for example, has estimated that if current trends continue for the next quarter of a century, by 2020 the Chinese economy could be 40 percent larger than that of the United States, while the economy of India will be larger than that of Germany. Moreover, the bank estimates that today's developing nations may account for over 60 percent of world economic activity by 2020, while today's rich nations, which currently account for over 55 percent of world economic activity, may account for only about 38 percent by 2020.22 These forecasts suggest that a dramatic shift in the economic geography of the world is now under way. For international businesses, the implications of this changing economic geography are clear; many of tomorrow's economic opportunities may be found in the developing nations of the world, and many of tomorrow's most capable competitors will probably also emerge from these regions.

Reflecting the dominance of the United States in the global economy, US firms accounted for 66.3 percent of worldwide foreign direct investment flows in the 1960s. British firms were second, accounting for 10.5 percent, while Japanese firms were a distant eighth, with only 2 percent. The dominance of US firms was so great that in Europe, books were written about the economic threat posed to Europe by US corporations.23 Several European governments, most notably that of France, talked of limiting inward investment by US firms in their economies.

However, as the barriers to the free flow of goods, services, and capital fell, and as other countries increased their shares of world output, non-US firms increasingly