Are We Prepared for a Multipolar World Economy?

Broadly, this arrangement still holds today, though hints of its erosion became evident some time ago. The benefits that emerging economies have reaped from expanding their presence in international trade and finance are but one example of this.

An increasingly multipolar global economy is likely to change the way the world conducts international business. A number of dynamic emerging-market firms are on a path toward dominating their industrial sectors globally in the coming years – much in the same way that companies based in advanced economies have done for the past half-century. In the years ahead, such firms are likely to press for economic reforms at home, serving as a force for increased integration of their home countries into global trade and finance.

So the time may be ripe to move forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920’s. In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment.

For now, the US dollar remains the most important international currency. But this dominance is waning, as evidenced by its declining use as an official reserve currency, as well as for invoicing goods and services, denominating international claims, and anchoring exchange rates.

The euro represents the dollar’s strongest competitor, so long as the eurozone successfully addresses its current sovereign-debt crisis through bailouts and longer-term institutional reforms that safeguard the gains from a long-running single-market project. But developing countries’ currencies will undoubtedly become more prominent in the longer term.

The size and dynamism of China’s economy, and the rapid globalization of its corporations and banks, makes the renminbi especially likely to take on a more important international role. In Global Development Horizons 2011, the World Bank presents what it believes to be the most probable global currency scenario in 2025 – a multicurrency arrangement centered on the dollar, euro, and renminbi. This scenario is buttressed by the likelihood that the US, the eurozone, and China will constitute the three major growth poles at that time.

Finally, the international financial community must live up to its responsibility to ensure that the development agenda remains a priority. Countries with global economic clout have a special responsibility to accept that their policy actions have important spillover effects on other countries. Monetary-policy initiatives that emphasize increased collaboration among central banks to achieve financial stability and sustainable growth in global liquidity thus would be particularly welcome.

Despite the considerable progress that developing countries have made in integrating themselves into international trade and finance channels, there is still much work to be done to ensure that they share the burden of maintaining the global system in which they have a rapidly growing stake. At the same time, it is critical that major developed countries craft policies that take into account their growing interdependency with developing countries. More and more, global governance will depend on leveraging that interdependency to strengthen international cooperation and boost worldwide prosperity.

Justin Yifu Lin is Chief Economist of the World Bank. Mansoor Dailami is lead author of Global Development Horizons, and Manager of the Emerging Global Trends Team of the Development Prospects Group at the World Bank.

Copyright: Project Syndicate, 2011.www.project-syndicate.org

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