A New Economic World Order
- 20 June 2015
There is no doubt that the world’s economic order is passing through an exceptional phase. Although the global financial crisis was an important turning point, the primary features of this phase began to take shape more than two decades before the crisis set in. It started with the People’s Republic of China setting on the road to economic growth. The country started to record double digit growth rates and sustained it for a long time until it managed to become the world’s second largest economy, surpassing Japan. China is likely to overtake the United States to occupy the first position within the next five years.
China has also made significant progress as an important power in the global financial system even though its conservative financial and monetary policies make its rise significantly slower. An important development took place during the last few days when the International Monetary Fund announced that it is in the process of adding the Chinese currency, Yuan, to Special Drawing Rights currency basket. This shows that China has become an indispensable power in managing the world’s financial system, that its financial system now meets the criteria for joining a global stage, and that the Yuan now meets the criteria of fair value, stable performance, and exchangeability. In a way this allows it to be considered for reserve status at the IMF alongside the dollar, euro, yen, pound sterling and other major currencies.
The rise of China has also come alongside the decline of some traditional economic powers. Instability in the euro zone is a clear example. It has witnessed inflation in government debt, a chronic increase in unemployment, and an economic slowdown unlike anything it has witnessed in decades. Things have reached a stage where Greece is now on the verge of bankruptcy and is faced with the possibility of leaving the euro zone. The turbulence has been felt in the wider European Union economy, which has pushed the United Kingdom, represented by its Central Bank, to study withdrawal from the union.
The cases of Greece leaving the euro zone and the UK leaving the European Union are important turning points in the history of the European economic unity; the most successful and largest example in international history. Their exit might mean the collapse of this model and its disintegration into small national economies that may be feeble compared to their situation before the unity. With the decline of conventional powers, the cases of Japan and the United States cannot be ignored. Both economies, despite their relative stability, still suffer from sovereign debt, fragile growth, and each one of them has lost at least one of the economic superiority requirements in the last few decades.
These circumstances, in general, means that the world economic order is currently undergoing a major transformation where conventional powers are declining, giving way to new powers. This calls for introspection for decision makers and economic policymakers around the world. The need of the hour is alternative policies that are more likely to channelize global growth. This will serve national objectives and prepare them for a new economic and financial system that cannot be dealt with using the same old tools.