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G L O B A L D E V E L O P M E N T H O R I Z O N S 2 0 1 1 v

Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xvii

Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix

OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Emerging Growth Poles Will Alter the Balance of Global Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Emerging-Market Multinationals Becoming a Potent Force in Reshaping the Process ofIndustrial Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Multipolar International Economy to Lead to a Larger Role for the Euro and, inthe Long Term, for the Renminbi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Multipolarity to Bring Benefits and New Challenges to the Developing World . . . . . . . . . . . . . . . . . 9

CHAPTER 1:Changing Growth Poles and Financial Positions. . . . . . . . . . . . . . . . . . . . . . . . . 13

Growth Poles and the Global Macroeconomy in the Postcrisis Era . . . . . . . . . . . . . . . . . . . . . . . . . 14

The Character of Growth in the Potential Emerging Economy Poles . . . . . . . . . . . . . . . . . . . . . . . . 24

Dynamics of New Growth Poles: Implications for Domestic Output, Trade Flow Patterns,and Global Payments Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Growth Poles and Multipolarity in the Future World Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Policy Challenges and the Development Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Annexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

CHAPTER 2:The Changing Global Corporate Landscape. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Emerging-Market Multinationals: Agents of Change in a Multipolar World . . . . . . . . . . . . . . . . . . . 75


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The Growth and Globalization of Emerging-Market Corporate Finance . . . . . . . . . . . . . . . . . . . . . . 89

Devising an Effective Framework for Cross-Border Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Annexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

CHAPTER 3:Multipolarity in International Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

International Currency Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Moving to a Multicurrency International Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

The Shape of Things to Come: Some Scenarios for a Future International Monetary System . . . 142

A Path toward Improved Institutional Management of a Multipolar World . . . . . . . . . . . . . . . . . . 147

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Annexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Boxes

1.1 What is a growth pole? Defining poles in theory and practice . . . . . . . . . . . . . . . . . . . . . . 16

1.2 Growth poles at the regional level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1.3 Proximate and fundamental factors related to multidimensional growth polarity . . . . . . . 22

1.4 Suggestive evidence of successful transitions to consumption-driven growth . . . . . . . . . 35

1.5 Modeling the current account and growth process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1.6 Multipolarity and commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

2.1 Empirical analysis of cross-border bilateral M&A flows from emerging economies . . . . . 872.2 The global expansion of cross-border financial transactions . . . . . . . . . . . . . . . . . . . . . . . 90

2.3 Data on international bond issues by firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

2.4 Econometric estimations of corporate bond spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

2.5 The long history of failed negotiations over a multilateral investment framework . . . . . . 105

3.1 Historically, one national currency has played a global roleor at most,a few national currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

3.2 Benefits from currency internationalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

3.3 The changing external financial position of developing countries . . . . . . . . . . . . . . . . . . 143

Figures1.1 Channels of growth spillovers from a growth pole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1.2 Historical evolution of simple growth polarity, selected economies, 12008 . . . . . . . . . . 18

1.3 Modern evolution of multidimensional growth polarity, selected advanced andemerging economies, 19692008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

1.4 Evolution of multipolarity, alternative indexes, 19682008 . . . . . . . . . . . . . . . . . . . . . . . . 23

1.5 Global distribution of growth poles, 199498 and 200408 . . . . . . . . . . . . . . . . . . . . . . . 24

1.6 Total factor productivity contribution to growth, selected potential poles . . . . . . . . . . . . . 26

1.7 Technological innovation, selected potential emerging economy poles . . . . . . . . . . . . . . 27


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1.8 Technological adoption, selected potential emerging economy poles, 19712003 . . . . . . 28

1.9 Export and consumption contribution to growth, selected potential poles . . . . . . . . . . . . 29

1.10 Dominance of consumption to exports in growth, selected potential emerging

economy poles, 19772006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301.11 Evolution of saving, selected potential growth poles, by sector . . . . . . . . . . . . . . . . . . . . 31

1.12 Incremental capital-output ratios, selected potential emergingeconomy poles, 19652008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.13 Investment shares of growth, selected potential emerging economypoles, 19722006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

1.14 Global distribution of research and development expenditure and researchershares, average over 200408 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

1.15 Global distribution and selected evolution of consumption share by per capita income . . 34

B1.4.1 Evolution of consumption and export shares, Botswana and Mauritius . . . . . . . . . . . . . . 35

1.16 Global real output shares, 2010 and 2025, baseline scenario . . . . . . . . . . . . . . . . . . . . . . 39

1.17 Output growth for emerging and advanced economies, 15-year average,19962010 (historical) and 201125 (baseline scenario) . . . . . . . . . . . . . . . . . . . . . . . . . . 40

1.18 Consumption and investment shares of output, current andpotential growth poles, 201125 baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1.19 Global import and export shares of global trade, advanced andemerging economies, 200425 baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

1.20 Net international investment positions, advanced and emerging economies,and selected net asset countries, 200425 baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

1.21 Evolution of multipolarity, economic size and simple polarity index,19682025 (projected) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

1.22 Shares of total LDC bilateral trade, selected advanced andemerging economies, 19912010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

1.23 Dominant LDC merchandise exports to and imports fromselected emerging economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

1.24 Net ODA from DAC countries to LDCs as share of LDC GDP, 19602008 . . . . . . . . . . . . 49

B1.6.1 Commodities price index, 19482010, and commodity intensity ofdemand, 19712010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

1A.1 Nominal GDP overtaking scenarios, selected emerging and advancedeconomy poles, 200925 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

1A.2 Real output growth in divergent productivity scenario, advanced economies andhigh- versus low-productivity emerging economies, 200525 . . . . . . . . . . . . . . . . . . . . . 60

1A.3 Marginal productivity of capital and imports under variousunbalanced growth scenarios, China, 201125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

1A.4 Investment share of output under various external balance scenarios,selected potential emerging economy poles, 200425 . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

2.1 Total cross-border M&A deals by firms from advanced economies andemerging-market economies, 19972010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

2.2 Total cross-border greenfield investment by firms from advancedeconomies and emerging-market economies, 200309 . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.3 Total cross-border greenfield investment and M&A deals byemerging-market firms, 200310 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

2.4 Geographic distribution of the top 1,000 firms by R&D spending . . . . . . . . . . . . . . . . . . . 77

2.5 Cross-border patents granted worldwide to residents ofemerging economies, 19952008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77


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2.6 Technology and institutional environment in developing and developed countries . . . . . . 78

2.7 Top source countries of emerging-market firms cross-borderM&A deals in emerging economies and advanced economies . . . . . . . . . . . . . . . . . . . . . 79

2.8 Top destination countries for emerging-market firms cross-borderM&A deals in emerging economies and advanced economies . . . . . . . . . . . . . . . . . . . . . 80

2.9 South-South cross-border greenfield investments and M&A deals, by value, 200310 . . 81

2.10 South-North cross-border greenfield investments and M&A deals, by value, 200310 . . 81

2.11 Cross-border M&A investment to low-income countries, 19972010 . . . . . . . . . . . . . . . . 85

B2.1.1 Selected bilateral M&A flows from home to host economies, 2007 . . . . . . . . . . . . . . . . . 87

2.12 Projected emerging-market outbound cross-border deals through 2025 . . . . . . . . . . . . . 89

B2.2.1 Global expansion of cross-border economic transactions, 19832008 . . . . . . . . . . . . . . . 90

B2.2.2 Stronger growth in international trade of financial assetsthan in goods trade, 19872008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

2.13 New cross-listings by foreign firms on U.S. and Europeaninternational stock exchanges, 200510 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

2.14 Share of cross-listed firms that announced acquisitions offoreign firms, 2005Q2 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

2.15 Equity financing raised on the LSE, NYSE, and NASDAQ by emerging-marketacquirer firms, 1995October 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

2.16 International bank lending to low-income countries, 19952010 . . . . . . . . . . . . . . . . . . . . 98

2.17 International bond issues emanating from emerging economies, 19982010 . . . . . . . . . 98

2.18 International debt financing by emerging-market firms, 200010 . . . . . . . . . . . . . . . . . . . 99

2.19 Average at-issue spreads of international privatecorporate bonds, by currency, 200307 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

2.20 Private bond spread versus GDP per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

2.21 Private bond spread versus sovereign risk rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

2.22 U.S. dollar corporate bond spread to benchmarks, 200010, average by year . . . . . . . . 103

2.23 Total number of active bilateral investment treaties, 19802007 . . . . . . . . . . . . . . . . . . 106

2.24 Number of bilateral investment treaties signed by advancedeconomy countries, as of 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

2.25 The number of newly signed South-South BITs rose rapidly in the 1990s,ahead of the actual surge in South-South investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

2A.1 Source of ADR issues on U.S. exchanges, 200010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111

2A.2 Breakdown of tallies for new foreign company listings on the LSE AIM, 200010 . . . . . .112

B3.1.1 Historical Timeline of Dominant International Currencies . . . . . . . . . . . . . . . . . . . . . . . . 129

3.1 Currency denominations of banks international assets and internationalbonds outstanding, by percentage, 19992010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

3.2 Global foreign exchange market turnover, by currency (net of local,cross-border, and double counting), 19982007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

3.3 Composite indicator of international currency shares, 19992009 . . . . . . . . . . . . . . . . . 132

3.4 Global currency shares relative to trade share and economic size . . . . . . . . . . . . . . . . . . 133

B3.2.1 Gains from the international status of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

3.5 Foreign residents U.S. asset holdings, 19802007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

3.6 U.S. balance of payments, 19462008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

3.7 The geographic distribution of trade concentration relative to China,the European Union, and the United States, 200509 period average . . . . . . . . . . . . . . 138

3.8 Share of global manufacturing exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140


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B3.3.1 Evolution of net international investment positions, advanced andemerging economies, 200425 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

3.9 Implied U.S. fiscal balances and global economic sizes, dollar standard and

multipolar currencies scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1443.10 Membership in major international organizations, 19452010 . . . . . . . . . . . . . . . . . . . . . 146

3.11 Macroeconomic policy disparities, selected actual and potential growth polesamong advanced and emerging economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

3.12 Exchange rate arrangements of developing countries, 2000 and 2010 . . . . . . . . . . . . . . 149

3.13 SDRs as a percentage of the worlds foreign exchange reserves, 19702010 . . . . . . . . 150

3.14 Distribution of foreign exchange reserves, 1999 and 2008 . . . . . . . . . . . . . . . . . . . . . . . 151

Tables

1.1 Multidimensional polarity index, top 15 economies, 200408 average . . . . . . . . . . . . . . . 20

B1.2.1 Regional simple polarity index, top three countries, 200408 average . . . . . . . . . . . . . . . 211.2 Current account balances, current and potential growth poles, 200425 . . . . . . . . . . . . . 41

1.3 Key perturbations for alternative growth and external balance scenarios . . . . . . . . . . . . . 44

1.4 Measures of growth poles, top 15 economies, 202125 baseline average . . . . . . . . . . . . 46

1A.1 Principal components index (with and without migration subindex) forgrowth poles, top 10 economies, 200408 average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

1A.2 Estimates for proximate determinants of growth polarity . . . . . . . . . . . . . . . . . . . . . . . . . 56

1A.3 Estimates for fundamental determinants of growth polarity . . . . . . . . . . . . . . . . . . . . . . . 57

1A.4 Correlations for consumption, investment, and exports with output, andchanges in consumption, investment, and exports with change inoutput, current and potential pole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

1A.5 Estimates for empirical current account balances model, by country group . . . . . . . . . . . 58

1A.6 Additional current account balances, potential poles, 200415 . . . . . . . . . . . . . . . . . . . . . 59

2.1 Regional distribution of cross-border mergers and acquisitions, bynumber of deals and value, 19972010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

2.2 Top emerging-market multinationals in cross-border mergers and acquistions,by number of deals, 19972010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

B2.4.1 Detailed econometric results for regressions on spread determinants . . . . . . . . . . . . . . 102

2A.1 Summary statistics of corporate bond issuance by emerging-marketcountries, 19952009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

2A.2 Definitions of key variables included in the database . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110

2A.3 Determinants of cross-border outbound M&A investments . . . . . . . . . . . . . . . . . . . . . . .114

3.1 Currency shares of foreign exchange reserve holdings, by percentage, 19952009 . . . 131

3.2 Importance of selected national financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

3.3 International debt securities outstanding, by currency, 19992010. . . . . . . . . . . . . . . . . . . 139

3.4 Renminbi local currency swap arrangements, July 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .141

3.5 Currency denominations of the external balance sheets of theUnited States and China, end-2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

3A.1 Estimates of long-run global money demand for the U.S. dollar, euro,pound sterling, and yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

3A.2 Principle factor analysis of international currency use . . . . . . . . . . . . . . . . . . . . . . . . . . . 155


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G L O B A L D E V E L O P M E N T H O R I Z O N S 2 0 1 1 xi

Foreword

THE WORLD ECONOMY IS IN HEmidst of a transformative change. One ofthe most visible outcomes of this trans-

formation is the rise of a number of dynamicemerging-market countries to the helm of theglobal economy. It is likely that, by 2025, emerg-

ing economiessuch as Brazil, China, India,Indonesia, and the Russian Federationwillbe major contributors to global growth, along-side the advanced economies. As they pursuegrowth opportunities abroad and encouraged byimproved policies at home, corporations basedin emerging markets are playing an increasinglyprominent role in global business and cross-border investment. Te international monetarysystem is likely to cease being dominated by a sin-gle currency. Emerging-market countries, wherethree-fourths of offi cial foreign exchange reserves

are currently held and whose sovereign wealthfunds and other pools of capital are increasinglyimportant sources of international investment,

will become key players in financial markets. Inshort, a new world order with a more diffuse dis-tribution of economic power is emergingthusthe shift toward multipolarity.

Troughout the course of history, major eco-nomic transitions have always presented chal-lenges, as they involve large uncertainties sur-rounding identification of emerging global issuesof systemic importance and development of

appropriate policy and institutional responses. Itis in this context that the World Bank is launch-ing a new report, Global Development Horizons(GDH).1 he new report serves as a vehiclefor stimulating new thinking and research on

anticipated structural changes in the globaleconomic landscape. o retain this forward-looking orientation and to serve the World BankGroups mandate of development and povertyalleviation, it is envisaged that future editions ofGDH will be dedicated to themes of importance

to the emerging development agenda and globaleconomic governance, including changing globalincome inequality, increasing economic inse-curity, global population aging, and the futureshape of development finance.

Te inaugural edition of GDH addresses thebroad trend toward multipolarity in the globaleconomy, particularly as it relates to structuralchanges in growth dynamics, corporate invest-ment, and international monetary and financialarrangements. Multipolarity, of course, has dif-ferent interpretations within different spheres of

contemporary international relations. In interna-tional politics, where much of the discussion hasbeen focused, the debate centers on the potentialfor a nonpolar world, in which numerous nationalconcentrations of power exist but no single centerdominates (as opposed to the bipolar global polit-ical environment that defined the Cold War era).In the realm of international economics, multi-polaritymeaning more than two dominantgrowth poleshas at times been a key featureof the global system. But at no time in modernhistory have so many developing countries been

at the forefront of a multipolar economic system.his pattern is now set to change. Within thenext two decades, the rise of emerging economies

will inevitably have major implicat ions for theglobal economic and geopolitical landscape.

1. GDH now contains the thematic analysis that previously appeared inGlobal Development Finance and GlobalEconomic Prospects. Global Economic Prospectswill continue to be produced, but without the thematic chapters, andGlobal Development Financewill be focused on data.


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xii Foreword Global Development Horizons 2011

the size and dynamism of Chinas economy andthe rapid globalization of its corporations andbanks will position the renminbi to take on a

more important international role. By 2025, themost probable global currency scenario will be amultipolar one centered around the dollar, euro,and renminbi. Tis scenario is supported by thelikelihood that the United States, the euro area,and China will constitute the three major growthpoles by that time, providing stimulus to othercountries through trade, finance, and technol-ogy channels and thereby creating internationaldemand for their currencies.

he potential for rising competition amongpower centers that is inherent in the shift to a

more multipolar world makes strengtheningpolicy coordination across economiesdevelop-ing and developedcritical to reducing the risksof political and economic instability. In the yearsleading up to the financial crisis, the role of inter-national economic policy making was confinedto managing the symptoms of incompatible mac-roeconomic policies, such as exchange rate mis-alignments and payments imbalances. As capitalmarkets have been liberalized and exchange ratesmade more flexible, balance of payments con-straints on national economies have been consid-

erably eased, shifting policy coordination towardthe more politically sensitive spheres of domesticmonetary and fiscal policy.

For its part, the international financial com-munity must recognize that it has a complex bur-den to shoulder in ensuring that the least devel-oped countries (LDCs) are guarded against thevolatility that could accompany the transitionto a multipolar order. Many LDCs are heav-ily reliant on external demand for growth and,hence, their ability to manage their external rela-tions becomes critical. For those with floating

exchange rate regimes, a critical element wouldbe the development of the necessary institutionalpolicy frameworks, market microstructure, andfinancial institutions that can ensure the smoothfunctioning of foreign exchange markets. Aidand technical assistance from international finan-cial institutions have the potential to cushionvolatility in these economies as they adapt to theglobal forces involved in the transition to a mul-tipolar world.

In a world of progressively more multipolareconomic growth and financial centers, policymakers will need to equip themselves with the

tools and capabilities to effectively capitalize onopportunities while simultaneously safeguard-ing their economies against the risks that remainstubbornly high as the global economy strugglesto find a stable footing. Within the realm ofimmediate concerns, the tragic earthquake andtsunami that hit Japan in March 2011, the polit-ical turmoil gr ipping much of the Middle Eastand North Africa, and the financial tremorsemanating from the European sovereign debtcrisis are all likely to exact a heavy toll on globalfinancial markets and growth. Seen against the

backdrop of a sub-par global growth trajectory,high levels of unemployment in many advancedand developing economies, and rising inflation-ary pressures in many emerging and low-incomeeconomies, these events call for further bold,concrete actions to shore up confidence andestablish the underpinning for bankers to lend,and for businesses to invest in equipment andtechnology that will boost productivity, create

jobs, and generate long-term growth. Indeed,it is through rising investment and economicgrowth that productive jobs will be created to

absorb the large youth cohort in the MiddleEast and North Africa region and elsewhere,that earthquake-shattered parts of Japan willbe rebuilt, and that fiscal consolidation in theUnited States and Europe will become moreachievable.

he transformation of global patterns ofeconomic growth is also driving a change inthe international monetary system. At the cur-rent juncture, the U.S. dollar remains the mostimportant international currency, despite a slowdecline in its role since the late 1990s and aban-

donment nearly forty years ago of the BrettonWoods system of fixed exchange rates (in whichthe dollar offi cially anchored the worlds curren-cies). But the dollar now faces growing compe-tition in the international currency space. Chief

within this space is the euro, which has gainedground in recent years as a currency in whichgoods are invoiced and offi cial reserves are held,

while the yen and pound represent only single-digit shares of offi cial reserves In the longer term,


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Initiative and greater emphasis on open knowl-edge exchange (http://data.worldbank.org). In thefuture, the site will also serve as a repository of

related research papers from the broader develop-ment community, as well as a vehicle for inter-active debate and networking with various thinktanks, business associations, and policy establish-ments concerned with long-term global economicchange and its implications for development pol-icy and discourse.

Justin Yifu LinSenior Vice President and Chief Economist

Te World Bank

Global Development Horizons 2011 Foreword xiii

Finally, the World Bank believes that a pub-lication geared toward stimulating new thinkingand research on the implications of a changing

global landscape should embed change in its ownformat and design. hus, GDH will consist ofboth a hard copy publication and a companion

website (http://www.worldbank.org/GDH2011)that will serve as an extension of the paper pub-lication. Tis website will be a platform for thereports underlying data, methodology, blog post-ings, and relevant background papers. Te site

wil l a lso include an interactive feature that wil lallow visitors to explore the scenarios describedin GDH. Tis is in line with the Banks agendato democratize development via our Open Data


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G L O B A L D E V E L O P M E N T H O R I Z O N S 2 0 1 1 xv

THIS REPOR WAS PREPARED BYthe Emerging Global rends team of the

World Bank s Development Prospect sGroup (DECPG). Mansoor Dailami was the leadauthor and manager of the team. Te report wasprepared with direction from Hans immer andunder the general guidance of Justin Yifu Lin,

World Bank Senior Vice President and ChiefEconomist.

he Overview was written by MansoorDailami with contributions from other teammembers. Chapter 1 was written by Jamus JeromeLim and Jonathon Adams-Kane. Dominiquevan der Mensbrugghe was the architect behindthe computable general equilibrium modelingusing the World Banks Linkage model. MohsinS. Khan (Peterson Institute for InternationalEconomics and formerly with the InternationalMonetary Fund) provided input and directionfor the current account modeling, John Baffesoffered technical advice on commodities, andhorsten Janus (University of Wyoming) pro-vided technical comments on measures of mul-tipolarity. Chapter 2 was written by MansoorDailami, Jacquel ine Irving, and RobertHauswald (American University) with writtencontributions from Sergio Kurlat, Yueqing Jia,and William Shaw. Chapter 3 was written byMansoor Dailami and Paul Masson (Universityof oronto) with contributions from Hyung SikKim, Sergio Kurlat, Gabriela Mundaca, and

Yueqing Jia.Te report also benefited from the comments

of the Banks Executive Directors, made at aninformal board meeting on April 21, 2011.

Many others provided advice, inputs, andcomments at various stages of the reports con-ceptualization and preparation. Ann Harrison

Acknowledgments

coordinated the review process within theDevelopment Economics Vice Presidency andprovided substantial comments and advice.Shahrokh Fardoust commented on the reportat its various writing stages. Marcelo Giugale,Manuela V. Ferro, Jeffrey D. Lewis, and Jon Faust(John Hopkins University) were peer review-ers at the reports concept paper stage. ManuelaV. Ferro, Jeffrey D. Lewis, Marcelo Giugale,Kalpana Kochhar, and Joshua Aizenman(University of California at Santa Cruz) werediscussants at the Bank-wide review. In addition,

within the Bank, comments were provided byAugusto de la orre, R itva Reinikka, IndermitGill, Ahmad Ahsan, Asli Demirguc-Kunt, IvailoIzvorski, Linda Van Gelder, Willem van Eeghen,Shantayanan Devarajan, Akihiko Nishio,Merrell uck-Primdahl, Ana Fernandes, AadityaMattoo, Hiau Looi Kee, Maggie Chen, HinhDinh, Vivian Hon, Jean-Jacques Dethier, Volkerreichel, Luis Serven, and David Rosenblatt.

Outside the Bank, invaluable help wasreceived from many experts through meetings,discussions, and presentation of the reportsearly findings. hey include Dale Jorgenson(Harvard University), Philip urner (Bank forInternational Settlements), and Ajay Shah and IlaPatnaik (National Institute of Public Finance andPolicy, India).

he online Global Development Horizonswebsite was produced by David Horowitz, JamusJerome Lim, Rebecca Ong, Sarah Crow, andKatherine Rollins. echnical help in the pro-duction of the website was provided by Roula

Yazigi and Vamsee Krishna Kanchi, and AugustoClavijo provided support for formatting figuresand tables for the final version of the report.Background papers and related research are


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Case, and Swati Priyadarshini Mishra, whomanaged dissemination activities. Book design,editing, and production were coordinated by

Cindy Fisher, Denise Bergeron, Santiago Pombo-Bejarano, and Patricia M. Katayama, of the

World Bank Offi ce of the Publisher.

available on the website (http://www.worldbank.org/GDH2011).

Dana Vorisek edited the report. Rosalie Marie

Lourdes Singson provided production assistanceto the Emerging Global rends team and toMerrell uck-Primdahl, Rebecca Ong, Cynthia

xvi Acknowledgments Global Development Horizons 2011


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G L O B A L D E V E L O P M E N T H O R I Z O N S 2 0 1 1 xvii

TH I S R E P O R I N R O D U C E Sterminology that is not commonly foundin World Bank publications. Tis glossary

defines some of the key terms and definitionsused.

Growth pole: An economy that significantlydrives global growth.

Growth polarity: A measure of the extent towhich an economys growth spills over to globalgrowth, along trade, finance, technology, andmigration channels.

Potential growth pole: An economy that hasthe potential to be a growth pole in the future,including those that have been identified as cur-rent growth poles.

Potential emerging economy pole : Potentialgrowth poles that are also emerging economies.

Multipolarity: Te existence of more than twogrowth poles in the world economy, measuredas the degree of concentration of growth polar-ity (the lower the concentration, the greater thedegree of multipolarity).

Advanced economies : Economies that havetraditionally been identified as industrializednations: Australia, Canada, the economies ofthe euro area and EU-15, Iceland, Japan, NewZealand, Norway, Switzerland, and the UnitedStates of America. Used interchangeably with theterm developed economies, when in contrast to

Glossary

developing economies, and with the term globalNorth, when in contrast to the global South.

Developing economies: Economies listed as low-income, lower-middle-income, and upper-middle-income according to the World Bank offi cialclassification.

Emerging economy/market: Economies withrelatively high levels of economic potential andinternational engagement, broader than traditionalDow Jones, FSE, JPMorgan Chase and MSCIclassifications: Algeria, Argentina, Azerbaijan,Te Bahamas, Bahrain, Barbados, Belarus, Brazil,Bulgaria, Chile, China, Colombia, Costa Rica,Croatia, Czech Republic, Dominican Republic,Ecuador, Arab Republic of Egypt, El Salvador,Estonia, Georgia, Ghana, Guatemala, Hungary,India, Indonesia, Jamaica, Jordan, Kazakhstan,Kenya, Republic of Korea, Kuwait, Latvia,Lebanon, Lithuania, Malaysia, Mexico, Mongolia,Morocco, Nigeria, Oman, Pakistan, Panama, Peru,Philippines, Poland, Qatar, Romania, RussianFederation, Saudi Arabia, Singapore, South

Africa, Sri Lanka, Tailand, rinidad and obago,urkey, Ukraine, United Arab Emirates, Uruguay,Repblica Bolivariana de Venezuela, and Vietnam.

AFR/SSA, EAP, ECA, LAC, MNA, SAR: Teoffi cial World Bank classifications of these regions(Africa, East Asia and Pacific, Europe and Central

Asia, Latin America and the Caribbean, MiddleEast and North Africa, and South Asia), includ-ing high-income countries located within theseregions.


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G L O B A L D E V E L O P M E N T H O R I Z O N S 2 0 1 1 xix

ADRs American Depository ReceiptsAIM Alternative Investment MarketASX Australian Securities ExchangeBIS Bank for International SettlementsBIs bilateral investment treaties

BRIC Brazil, the Russian Federation, India, and ChinaBRIICKS Brazil, the Russian Federation, India, Indonesia, China, and the Republic of KoreaCBO U.S. Congressional Budget Offi ceEC error componentsECB European Central BankEFSF European Financial Stability FacilityEFSM European Financial Stability MechanismEM emerging marketEOI export-oriented industrializationEU European UnionFDI foreign direct investmentGAS General Agreement on rade in Services

GA General Agreement on ariffs and radeGDP gross domestic productGGB German government bondGMM generalized method of momentsGNI gross national incomeHBS Harrod-Balassa-SamuelsonICOR incremental capital-output ratioICRG International Country Risk Guide (PRS Group)IDRs Indian depositary receiptsIE International Enterprise (Singapore)IEA International Energy AgencyIFS International Financial Statistics (IMF)

IIPs international investment positionsIMF International Monetary FundISI import substituting industrializationIV instrumental variablesLDCs least developed countriesLSE London Stock ExchangeM1 notes and coins in circulationM2 money holdingsM&A merger and acquisitionNASDAQ a U.S. stock exchange (formerly National Association of Securities Dealers Automated

Quotations)

Abbreviations


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xx Abbreviations Global Development Horizons 2011

NYSE New York Stock ExchangeOECD Organisation for Economic Co-operation and DevelopmentPMG pooled mean groupPPP purchasing power parityR&D research and developmentSDR(s) Special Drawing Right(s)SGX Singapore Stock ExchangeSWFs sovereign wealth fundsFP total factor productivityUSEIA U.S. Energy Information Administration

WDI World Development Indicators (World Bank)WIPO World Intellectual Property Organization

All dollar amounts are U.S. dollars unless otherwise indicated.


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Global Development Horizons 2011 1

Overview

SWEEPING CHANGES ARE AFOOin the global economy. As the seconddecade of the 21st century unfolds and

the world exits from the 200809 financial crisis,the growing clout of emerging markets is pavingthe way for a world economy with an increasinglymultipolar character. Te distribution of globalgrowth will become more diffuse, with no singlecountry dominating the global economic scene.

Te seeds of this change were planted sometime ago. Over the past two decades, the worldhas witnessed emerging economies rise to becomea powerful force in international production,trade, and finance. Emerging and developingcountries share of international trade flows hasrisen steadily, from 26 percent in 1995 to an esti-mated 42 percent in 2010. Much of this rise has

been due to an expansion of trade not betweendeveloped countries and developing countries,but among developing countries. Similarly, morethan one-third of foreign direct investment indeveloping countries currently originates inother developing countries. Emerging economieshave also increased their financial holdings and

wealth. Emerging and developing countries nowhold three-quarters of al l offi cial foreign exchangereserves (a reversal in the pattern of the previousdecade, when advanced economies held two-thirds of all reserves), and sovereign wealth funds

and other pools of capital in developing countrieshave become key sources of international invest-ment. At the same time, the risk of investing inemerging economies has declined dramatically.Borrowers such as Brazil, Chile, and urkey nowpay lower interest rates on their sovereign debtsthan do several European countries.

As investors and mult inational companiesincrease their exposure to fast-growing emerg-ing economies, international demand for

emerging-economy currencies will grow, makingway for a global monetary system with more thanone dominant currency. Te growing strength ofemerging economies also affects the policy envi-ronment, necessitating more inclusive global eco-nomic policy making in the future.

Tis broad evolution under way in the globaleconomy is not without precedent. Troughoutthe course of history, paradigms of economicpower have been drawn and redrawn accordingto the rise and fall of states with the greatest capa-bility to drive global growth and provide stimulusto other countries through cross-border com-mercial and financial engagements. In the firsthalf of the second millennium, China and India

were the worlds predominant growth poles. TeIndustrial Revolution brought Western European

economies to the forefront. In the postWorldWar II era, the United States was the predomi-nant force in the global economy, with Germanyand Japan also playing leading roles.

In more recent years, the global economy hasbegun yet another major transition, one in whicheconomic influence has clearly become more dis-persed than at any time since the late 1960s. Justas important, developing countries have neverbeen at the forefront of multipolarity in economicaffairs. During the forecast period of GlobalDevelopment Horizons (GDH) 2011from 2011

to 2025the rise of emerging economies willinevitably have major implications for the globaleconomic and geopolitical hierarchy, just as simi-lar transformations have had in the past.

Increased diffusion of global growth and eco-nomic power raises the imperative of collectivemanagement as the most viable mechanism foraddressing the challenges of a multipolar worldeconomy. Te key differences that the manage-ment of a multipolar global economy will present


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2 Overview Global Development Horizons 2011

link between economic power concentration andstability, the North-South axis of capital flows,and the centrality of the U.S. dollar in the global

monetary system. Such a reappraisal offers muchin advancing the debate on the future course ofinternational development policy and discourse.

In anticipation of the shape of the futureglobal economy, this first edition of GlobalDevelopment Horizons aims to map out theemerging policy agenda and challenges that anincreasingly multipolar world economy poses fordeveloping countries.

Emerging Growth Poles Will

Alter the Balance ofGlobal Growth

he coming decades will see global economicgrowth increasingly being generated in emerg-ing economies. By 2025, global economic growth

wi ll predominant ly be generated in emergingeconomies. Although many high-income coun-tries are only gradually recovering from the finan-cial crisis, most developing countries have swiftlyreturned to their fast precrisis growth trend.China was one of the first economies to emerge

from the crisis, and it returned quickly to around10 percent growth. India experienced a strongercontraction, but also attained more than 10 per-cent growth in 2010, and the government is put-ting in place an ambitious new Five Year Plan(with improved policies and necessary invest-ment programs) to keep growth at that level.Latin America sharply rebounded in 2010, aftercontracting sharply in 2009. Even Sub-Saharan

Af rica is expected to return quickly to almost6 percent annual growth, similar to its perfor-mance in the years before the crisis. Even in the

absence of such exceptionally high growth ratesin the developing world, the balance of globalgrowth is expected to shift dramatically.

Te changing role of developing countries willcome with major transformations to their econo-mies, corporate sectors, and financial systems.Tese changes are likely to occur in a wide vari-ety of scenarios. Te baseline scenario consideredin GDH 2011which is derived from longer-term historical trends and from forward-looking

relative to the postwar era of the U.S.-centeredglobal economic order relate to the distributionof the costs and responsibilities of system main-

tenance and the mechanisms for sharing the spe-cial privileges and benefits associated with being aglobal growth pole. In the postwar era, the globaleconomic order was built on a complementaryset of tacit economic and security arrangementsbetween the United States and its core partners,

with developing countries playing a peripheralrole in formulating their macroeconomic poli-cies and establishing economic links with an eyetoward benefiting from the growth dynamism indeveloped countries. In exchange for the UnitedStates assuming the responsibilities of system

maintenance, serving as the open market of lastresort, and issuing the most widely used interna-tional reserve currency, its key partners, WesternEuropean countries and Japan, acquiesced to thespecial privileges enjoyed by the United Statesseigniorage gains, domestic macroeconomic pol-icy autonomy, and balance of payments flexibility.

Broadly, this arrangement still holds, thoughhints of its erosion became evident some timeago. For example, the end of the postwar goldexchange standard in 1971 heralded a new eraof floating currencies (formalized by the Jamaica

Agreement in 1976), a trend that has not beenlimited to developed countries. Particularly sincethe East Asian financial crisis of 199798, devel-oping countries have increasingly floated theircurrencies. Changes in currency use have alsooccurred. As Europe has followed a trajectory ofever-increasing economic integration, the eurohas come to represent a growing proportion ofinternational transactions and foreign exchangereserve holdings. At the same time, developingeconomies increased trade flows and the gradualopening of their economies to foreign capital have

benefited developing economies handsomely,boosting their growth potential and tying theireconomic and financial stakes to the continu-ation of a liberal global order. In the unfoldingglobal economic environment, in which a num-ber of dynamic emerging economies are evolvingto take their place at the helm of the global econ-omy, the management of multipolarity demandsa reappraisal of three pillars of the conventionalapproach to global economic governancethe


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Global Development Horizons 2011 Overview 3

components such as anticipated changes indemography, labor force growth, saving patterns,and educational levelsoffers a lens into the pos-

sible transformations to come. Tis scenario envi-sions average growth over the next 15 years that

will be substantially lower than the highs of 2010.However, emerging economies will still, collec-tively, expand by an average of 4.7 percent peryear (more than twice the developed worlds 2.3percent rate) between 2011 and 2025. (Given theconsiderable uncerta inty underlying long-termgrowth projections, the baseline scenario includeserror bands to emphasize the wide range of pos-sible outcomes). By 2025, six major emergingeconomiesBrazil, China, India, Indonesia, the

Republic of Korea, and the Russian Federationwill collectively account for more than half of allglobal growth. Several of these economies will col-lectively account for more than half of the globalgrowth rate. Tis new global economy, in whichthe centers of growth are distributed across bothdeveloped and emerging economies, is what GDH

2011envisions as a multipolar world.

Altering this balance calls for productivitygrowth in emerging economies andrealignment of demand away from

external sourcesEven with a moderation of growth in developingcountries, successful realization of the baselinescenario presented in GDH 2011 is dependenton several important changes to the characterof growth in emerging economies. In particular,strong future growth performance of emergingmarkets depends critically on these economiesability to sustain improvements in technologicaldynamismoften referred to as total factor pro-ductivity (FP)and to successfully transitiontoward internal sources of demand.

Historically, economic progress in emerg-ing economies has followed one of two paths.he first, which characterizes economies suchas China, India, and Russia, is one in whichFP growth is a major contributor to economicgrowth. he second path, which has recentlybeen common among the economies of Latin

America and Southea st Asia , is one in whichgrowth is led by the rapid mobilization of factorsof production. Yet even in the former case, FP

growth has been largely due to the rapid adop-tion of existing technologies, economywide factorreallocation, and improvements in institutional

governance, rather than progress in pure innova-tive capacity. Te long-run viability of fast-pacedgrowth in emerging economies will thus depend,in part, on the ability of emerging economies toenhance their indigenous innovation throughinvestments in human capital and through thecreation of appropriate institutional mechanismsto stimulate expenditure on research and devel-opment (R&D).

Innovation and innovative capacity arealready rising in emerging economies. Since2000, China and India have invested heavily

in R&D; expenditures on R&D accounted for1.4 percent of gross domestic product (GDP) inChina and 0.8 percent in India, about an orderof magnitude greater than that shown by peereconomies in their respective income groups.Te siting of major research facilities in Chinaby Microsoft, the invention of the Nano micro-car by Indian firm ata, and the continued stringof aeronautical breakthroughs in Russia suggestthe emerging-economy giants strong poten-tial for fostering growth through technologicaladvancement.

Rapid growth in the major emerging econo-mies will also need to be accompanied by arealignment of growth away from externalsources and toward internal demanda pro-cess that is under way in many cases. In China,for example, consumption is projected to risefrom the current 41 percent of national incometo 55 percent by 2025, much closer to the levelof developed countries. Similar increases arealso likely to occur in the emerging economiesof Eastern Europe. Latin American economies,

where the consumption share of income is already

65 percent and is expected to remain at that level,will be the exception to this trend. Te sharpestdeclines in savings rates are likely in East Asianand Eastern European economies, where popu-lation aging will be at a more advanced stage.In Eastern Europe, rising levels of consumptionare likely to occur concomitantly with relativedeclines in investment shares, consistent with thedeclining labor force in several countries. As aresult, current account deficits could narrow in


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in 2010 (approximately three times the $2.1 tril-lion in reserves held by advanced economies), andthe share of cross-border mergers and acquisitions

(M&A) by firms based in emerging economies in2010 was 29 percent ($470 billion) of the globaltotal.

he road ahead for emerging economieswhile cautiously po sit ivewil l nevert helessentail downside risks of both a short- and along-term nature. If economies with historicallylow FP contributions are unable to raise theirproductivity levels through institutional reformand technological innovation, the existing two-track global economy may fracture even furtherinto a slowly divergent growth path between

advanced economies, low-productivity develop-ing economies, and high-productivity developingeconomies. Similarly, if outward-oriented emerg-ing economies with weak internal demands arenot successful in increasing their consumptionshare, capital in these economies may eventuallybe channeled toward increasingly unproductive,low-yielding investments. he run-up in com-modity prices since 2003 may also become per-sistent, which could potentially derail growthin developing countries that are especially com-modity intensive. On the upside, if emerging

economies successfully navigate their rising percapita incomes, provide necessary infrastructuralimprovements, and facilitate corporate sectorreform, the baseline scenario may underestimateemerging economies future growth potential.Finally, unexpected economic and geopoliticaldevelopments may introduce fundamental uncer-tainty of a nature that is impossible to developscenarios for.

Emerging-Market Multinationals

Becoming a Potent Force inReshaping the Process ofIndustrial Globalization

Long relegated to second-tier status, emerging-market companies are becoming powerful forcesand agents of change in the global industrialand financial landscape. rends in foreign directinvestment (FDI) flows are one indication ofthis shifting status. Between 1997 and 2003,

those countries. Conversely, account surplusesin several Asian countries could be reduced withthe declining savings rates. ogether with ris-

ing domestic savings in the United States afterthe financial crisis, the more prominent role ofemerging economies coincides with a narrowingof global imbalances, which indeed is part of thebaseline scenario.

Sustaining higher consumption shares of out-put in emerging economies will be key in con-solidating the transition from externally drivento internally driven growth and will require anexpansion of the middle class, which, in turn,

will call for emerging-market policy makers tousher in broad financial sector development and

to improve domestic social safety nets. o meetdemand for more diverse consumption goods,increasing numbers of small and medium enter-prises are required, together with open traderelations.

As the international trade shares of theemerging and developed world converge,

global wealth and asset holdings will shifttoward emerging economies

As a group, emerging economies are likely toexperience significant increases in their inter-

national trade flows by 2025, in terms of bothimports and exports. he value of Indonesiasexports, for example, is likely to double between2010 and 2025, while the value of its importsis expected to be more than one-and-a-halftimes higher by 2025. Global trade is forecast toexpand as a share of global output over the sametime period, from 49.9 percent of output to 53.6percent.

Tese current account paths mean that majoremerging economies are likely to collectivelytake on a large and rising net asset international

position (albeit at a diminishing rate) in theirholdings of investments in developed economies(which, in turn, are expected to build equallylarge net liability positions). Global wealth andasset holdings will thus shift further towardemerging economies with surpluses, such asChina and major oil exporters in the MiddleEast. Tis adjustment is already reflected in thecurrent financial landscape: International reservesheld by emerging economies topped $7.4 trillion


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emerging-market firms is forecast to more thandouble by 2025, while the annual number ofcross-border M&A deals is expected to more than

triple (from fewer than 2,500 in 2011 to almost8,000 in 2025). Tis trend outpaces the underly-ing GDP growth rates in emerging-market firmshome countries.

he development of emerging-market firmsinto a potent force for globalization in their ownright will have important implications for cross-border capital formation, technology genera-tion and diffusion, and financing of commercialactivities. A number of innovative and dynamicemerging-market firms are on a path toward dom-inating their industrial sectors globallymuch in

the same way that companies based in advancedeconomies have done over the past half century.Many emerging-market firms have already begunovertaking their advanced-country competitorsin terms of the priority accorded to developinginnovative technologies and industrial processes,

with 114 firms from emerging economies rankingamong the top 1,000 firms worldwide by R&Dspending as of 2009, twice as many as five yearsearlier. Tis is a particularly noteworthy accom-plishment given that the private sector tradition-ally has not been the main financier of R&D in

developing countries. In 2025, a luxury sedan isas likely to be a Hyundai or ata as a Mercedesor Lexus, is as likely to be powered with fuel fromLukoil or Pertamina as from ExxonMobil or BP,and is as likely to be financed by Chinas ICBC(Industrial and Commercial Bank of China Ltd.)or Brazils Ita as by Citi or BNP Paribas.

Tere are strong signs of mutually reinforcinglinks between commercial and nancial

globalizationTe shift in economic and financial power toward

the developing world is also reshaping cross-bordercorporate finance, transforming emerging-marketfirms into significant participants in internationalcapital markets. Te progress of a growing numberof developing countries in improving the sound-ness and transparency of domestic institutions andpolicies has enabled their firms to gain increasedaccess to international bond and equity markets,and at better terms, in their efforts to expandglobally. Nearly two-thirds of emerging-market

companies based in emerging economies engagedin cross-border investment through M&Adeals of $189 billion, or 4 percent of the value

of all global M&A investments over the period.Between 2004 and 2010, that amount increasedto $1.1 trillion17 percent of the global total.Since 2003, approximately 5,000 firms basedin emerging markets have established a globalpresence through 12,516 greenfield investmentsof $1.72 trillion. More than one-third of FDIinflows to developing countries now originate inother developing countries: Of the 11,113 cross-border M&A deals announced worldwide in2010, 5,623more than halfinvolved emerg-ing-market companies, either as buyers or as take-

over targets by advanced-country firms. As theyventure overseas, companies based in emergingmarkets tend to seek assets that will help themaccomplish one or more of several goals: diver-sification of their growth, a larger global marketshare, exploitation of growth opportunities notavailable in their domestic economies, or freedomfrom an unfavorable domestic economic climate.

As they pursue growth opportunities abroad,corporations based in emerging markets playan increasingly prominent role in global busi-ness, competing with firms based in advanced

countries for natural resources, technology, andaccess to international markets. Many emerg-ing-market firms often have an advantage overadvanced-country firms in navigating difficultpolicy environments in other developing coun-tries, because they have experienced similar con-ditions in their home countries. Tese two trends,together with the overall strengthening of South-South trade links, will ensure that South-Southinvestment continues to expand. Further, M&Aactivity by emerging-market firms in develop-ing countries is on the rise and is becoming an

important source of FDI. Because such transac-tions typically occur within close geographicalproximity, they will not only deepen regionaleconomic ties, but also accelerate the integrationof low-income countries into the global economy.Emerging-market firms have also been active inSouth-North acquisitions, especially in advancedeconomies with sophisticated equity markets andfavorable growth prospects. Te annual value ofcross-border M&A transactions undertaken by


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From a policy perspective, the growing roleand influence of emerging-market firms in globalinvestment and finance may make it more pos-

sibleand indeed, criticalto move forwardwith the sort of multilatera l framework for reg-ulating cross-border investment that has beenderailed several times since the 1920s. In contrastto international trade and monetary relations, nomultilateral regime exists to promote and governcross-border investment. Instead, the surge ofbilateral investment treaties (BIs)more than2,275 BIs were in place in 2007, up from just250 in the mid-1980shas provided the most

widely used mechanism for interstate negotia-tion over cross-border investment terms, includ-

ing access to international arbitration of disputes.Tough BIs have proven to be suboptimal froman economic point of view, there are reasons tobelieve that their proliferation and the associ-ated experience of formulating, negotiating,and implementing them across a large numberof developed and developing countries have setthe stage for transition into a multilateral frame-

work. Te elimination of investment restrictionsthrough BIs, for example, may be supportive ofmore general multilateral liberalization efforts.Moreover, BIs have also set the stage for com-

plementary institutional advancements at theglobal level. Indeed, the International Centre forthe Settlement of Investment Disputes (ICSID)has experienced growing demand for cross-borderinvestment dispute settlement servicescasesregistered with the ICSID averaged 25 per yearbetween 2001 and 2010, up from an average ofabout two cases per year between 1981 and 1990.Tis increase in demand has allowed the matu-ration of an institutional infrastructure that is

well positioned to serve as an important founda-tion, especially on legal aspects, for a multilateral

framework in the future.

Multipolar InternationalEconomy to Lead to a LargerRole for the Euro and, in theLong Term, for the Renminbi

Rapid growth in emerging-market economies hasled to enormous wealth creation and substantial

firms that have been active acquirers since thelate 1990sthose firms that have undertaken 10or more acquisitionshave tapped international

markets to access one or more forms of financingthrough syndicated loans, bond issues, and equitylistings. As evidence of the mutually reinforcinglinks between commercial and financial globaliza-tion, a growing number of emerging-market firmsundertake at least one cross-border acquisition

within two years of accessing international capi-tal markets. International bond issuance, in par-ticular, by borrowers based in emerging marketshas grown dramatically since the mid-1990s andis now one of the main sources of capital inflowsfor those countries. Since 1995, a large number

of emerging private companies have engaged inhigh-profile global bond market transactions, with80 of them issuing bonds over $1 billion each, of

which 10 were issuances of over $2 billion. Someprominent issuers include Petrobras InternationalFinance Company of Brazil, Amrica Mvil ofMexico, Novelis Inc of India, and VB bank ofRussia. Over the next decade and beyond, there islikely to be significant scope for emerging-marketcompanies to further expand their access to inter-national capital markets and at more favorableterms.

In emerging-market economies such as Brazil,Chile, and Mexico, where local capital marketshave seen considerable growth and maturity inrecent years, companies have the capacity to fundtheir growth through a more balanced mix oflocal and international capital market issuance.Furthermore, in some emerging growth poles,particularly those in Asia, signs already existthat their local capital markets are evolving intoregional financing hubs. During the next decadeand beyond, as local consumer demand continuesto rise in the fastest-growing emerging markets

and as local capital markets in those countriesbecome deeper and better regulated, manufactur-ing and consumer goods firms based in developedcountries can be expected to also seek access tocapital markets in emerging markets. Cross-listings of securities by developed-country firms,although initially motivated by the desire to raisetheir firms brand recognition, will be followed byissues that tap large pools of available savings inemerging markets.


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accumulation of their net claims on the rest ofthe world, raising the profile of emerging mar-kets in the international financial system as a

result. Developing and emerging countries heldtwo-thirds of the worlds $9 tril lion of offi cial for-eign exchange reserves as of late 2010, comparedto only 37 percent of reserves held at the end of2000. Sovereign wealth funds and other poolsof capital in developing countries have becomea major source of international investment.Between 2010 and 2025, the collective net inter-national investment position of major emergingmarkets is projected to rise to a surplus of morethan $15.2 trillion (in 2009 dollars) under thebaseline scenario presented in GDH 2011, offset

by a corresponding deficit in todays advancedeconomies.

Even though the role of emerging markets ininternational finance is growing, there is a greatdisparity between their economic size and theirrole in the international monetary system. Atpresent, no emerging economy has a currencythat is used internationallythat is, one in whichofficial reserves are held, goods and servicesare invoiced, international claims are denomi-nated, and exchange rates are anchoredto anygreat extent. Virtually all developing countries

are exposed to currency mismatch risk in theirinternational trade and investment and financ-ing transactions. Addressing these disparities inthe international monetary system needs urgentattention, in terms of both the management ofthe system (here, the International MonetaryFund [IMF] continues to play a leading role) andthe understanding of long-term forces shapingthe future workings of the system.

International currency use exhibits consider-able inertia and is subject to network externali-ties, rendering currencies already in widespread

use the most attractive. For now, the U.S. dollarremains the chief international currency, despitea slow decline in the proportion of global reservesheld in dollars since the late 1990s. But the dol-lar now faces several potential rivals for the roleof international currency. At present, the euro isthe most credible of those alternatives. Its statusis poised to expand, provided the euro area cansuccessfully overcome the sovereign debt crisescurrently faced by several of its member countries

and can avoid the moral hazard problems asso-ciated with bailouts of countries within theEuropean Union.

Looking further ahead, as emerging econo-mies account for an ever-growing share of theglobal economy and participate more activelyin cross-border trade and finance, one sees thattheir currenciesparticularly the renminbi

will inevitably play a more important role in theinternational financial system. A larger role forthe renminbi would help resolve the disparitybetween Chinas great economic strength on theglobal stage and its heavy reliance on foreign cur-rencies. On one hand, China is the worlds largestexporting country and holds the largest stock of

foreign exchange reserves by far ($2.9 trillion heldas of end 2010). On the other hand, China faces amassive currency mismatch because transactionsby its government, corporations, and other enti-ties with the rest of the world are almost entirelydenominated in foreign currencies, primarilyU.S. dollars. With private entities in China notable to directly address the currency mismatch,the task falls to the government. In moving toaddress such issues, Chinese authorities haveundertaken the internationalizing of the ren-minbi on two fronts: (1) developing an offshore

renminbi market and (2) encouraging the use ofthe renminbi in trade invoicing and settlement.Such initiatives are beginning to have an effect inlaying the foundation for the renminbi taking ona more important global role.

Building on this unfolding reality, GDH 2011presents three potential scenarios for the futureof the international monetary system: a statusquo centered on the U.S. dollar, a multicurrencysystem, and a system with the Special DrawingRight (SDR) as the main international currency.Te most likely of the three scenarios is the mul-

ticurrency system. Under this scenario, the cur-rent predominance of the U.S. dollar would endsometime before 2025 and would be replaced bya monetary system in which the dollar, the euro,and the renminbi would each serve as full-fledgedinternational currencies. his expected transi-tion raises several important questions. First, how

will developing countries, the majority of whichwil l continue to use foreign currencies in tradeof goods and assets, be affected by a move to a


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In a multipolar global economy, it is likely thatdissatisfaction with a national currencybasedsystem will deepen. But from a monetary policy

perspective, the creation of a system in whichglobal currency decisions are made on a truly mul-tilateral levelthat is, with the explicit agreementof a large number of countriesis not likely; assuch, a new system would require countries tocede national sovereignty over their monetarypolicy. he great deal of inertia in the currentinternational monetary system based on nationalcurrencies is also a factor, as is the expectation thata more diffuse distribution of global economicpower is likely to render cooperation on any sortof economic policy across borders more diffi cult.

In the years leading up to the financial crisis,the role of international economic policy mak-ing was confined to managing the symptomsof incompatible macroeconomic policies, suchas exchange rate misalignments and paymentsimbalances. As capital markets have been liber-alized and exchange rates made more flexible,balance of payments constraints on nationaleconomies have been considerably eased, shiftingpolicy coordination toward the more politicallysensitive spheres of domestic monetary and fiscalpolicy. Unless a countrys borrowing and trade

are concentrated in one of the three key curren-cies, instability in exchange rates between thekey currencies will lead to fluctuations in com-petitiveness and the value of assets and liabilities,impeding that countrys economic policy makingand potentially jeopardizing the welfare of its res-idents. Tus, countries without leading currencies

will need to step up their efforts to hedge againstexchange rate volatility. Tis will be the case fordeveloping countries, in particular.

Some of the challenges facing the internationalmonetary system could possibly be managed

through increased use of the SDR. Established bythe IMF in the 1960s as an international reserveasset and unit of account, the SDR is currentlyvalued in terms of a basket of four major inter-national currenciesthe euro, Japanese yen,pound sterling, and U.S. dollar. Enhancing therole of the SDR in the international monetarysystem could help address both the immediaterisks to global financial stability and the ongoingcosts of currency volatility. From an operational

multicurrency system? Second, can a multipolareconomic systemwith its dangers of instabil-itybe managed within the existing institutional

arrangements, or is a more fundamental reformof the system necessary? Tird, what can be doneto smooth the transition to multipolarity, shortof fundamental reform of the international mon-etary system?

A more multipolar international monetarysystem will still involve currency risks formost developing countriesTe dollar-based international monetary system ofthe present and the likely multicurrency system ofthe future share a number of defects inherent to

a system based on national currencies. Te fun-damental problem is an asymmetric distributionof the costs and benefits of balance of paymentsadjustment and financing. Countries whose cur-rencies are key in the international monetary sys-tem benefit from domestic macroeconomic policyautonomy, seigniorage revenues, relatively lowborrowing costs, a competitive edge in financialmarkets, and little pressure to adjust their exter-nal accounts. Meanwhile, countries without keycurrencies operate within constrained balance ofpayment positions and bear much of the external

adjustment costs of changing global financial andeconomic conditions. Tis asymmetric distribu-tion of the cost of adjustment has been a majorcontributor to the widening of global currentaccount imbalances in recent years. It has alsoproduced a potentially destabilizing situation in

which (a) the worlds leading economy, the UnitedStates, is also the largest debtor, and (b) the

worlds largest creditor, China, assumes massivecurrency mismatch risk in the process of financ-ing U.S. debt. Another shortcoming of the currentsystem is that global liquidity is created primar-

ily as the result of the monetary policy decisionsthat best suit the country issuing the predominantinternational currency, the United States, ratherthan with the intention of fully accommodatingglobal demand for liquidity. Tis characteristicmeans that the acute dollar shortage that devel-oped in the wake of the Lehman Brothers collapsein 2008, which particularly affected non-U.S.banks, was in many respects worse than the dollarshortage of the 1950s.


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coordination framework put into place by theGroup of 20 (G-20) and to preserve the gainsmade in central bank collaboration and har-

monization of financial regu lations during the200809 financial crisis. Importantly, coordi-nation should focus on outcomes that would bemutually beneficial to a large number of coun-triesthat is, on international public goods, suchas environmentally friendly technologiesratherthan on zero-sum variables, in which a gain forone country implies a loss for another. Only byrecognizing that multilateral coordination has

welfare-enhancing benefits for all will countriesvoluntarily take into account the concerns ofother countries.

Multipolarity to Bring Benefitsand New Challenges to theDeveloping World

A more multipolar global economy will, on bal-ance, be positive for developing countries as a

wholethough not necessarily for each of themindividually. Growth spilloversflowing fromtrade, finance, migration, and technology chan-nelswill induce technological transfer, spur

demand for exports, and improve the terms oftrade in developing countries as well as enablethem to develop their domestic agriculturaland manufacturing industries. For example,since 1990, bilateral trade flows between theleast developed countries (LDCs) and the majoremerging economies have increased threefold;trade with emerging economies now accountsfor a greater share of LDCs bilateral trade flowsthan their trade with major advanced economies.Moreover, a more diffuse distribution of globalgrowth will also create new external growth driv-

ers, meaning that idiosyncratic shocks in individ-ual growth pole economies will have less impacton the volatility of external demand in thosecountries than at present. Tis characteristic wasevident in the aftermath of the 200809 finan-cial crisis, when cross-border M&A originating inemerging economies accounted for more than aquarter of the value of all deals in 2009 and 2010.Greater multipolarity could also have a tangibleeffect on patterns of foreign aid, as increased aid

perspective, there are two main ways to increaseuse of the SDR. he first would be to encour-age official borrowing denominated in SDRs.

A second avenue would be to formalize centralbank currency swap facilities using the SDR,

which would be useful during a financia l crisis,or perhaps to adjust the composition of the SDRbasket to include the renminbi or other majoremerging-market currencies. Over time, the SDRcould serve as a natural hedge, especially for low-income countries that lack developed financialmarkets.

Nevertheless, a multilateral approachwill remain the best way to manage global

economic policy makingIn a world of progressively more multipolar eco-nomic growth and financial centers, interdepen-dency will be the operating norm even more thanat the present, bringing new challenges for eco-nomic diplomacy, national economic policy mak-ing, and management of transnational capitalchanneled across national borders. Te potentialfor rising competition among power centers thatis inherent in the shift to a more multipolar worldmakes it especially important to improve thedesign of policy coordination across economies

both developing and developed. More generally,as global economic integration increases, so, too,do spillovers of monetary and fiscal policies acrosscountries. hus, policy coordination is needednot only to improve the average performance ofthe global economy, but also to avert the atten-dant risks. Countries should move quickly tobetter coordinate their responses to global imbal-ances, to improve financial regulation, and toexpand mutual surveillance of macroeconomicpolicies. o the extent that the vulnerability thatcomes with interdependence can be managed

through appropriate responses by internationalinstitutions and multilateral agreementssuchas the provision of emergency financial assis-tance and commitments to open-door policies toensure access to international marketsinterde-pendence can lead to a shared increase in globalprosperity.

Even in the absence of fundamental reformin international policy coordination, a numberof concrete steps could be taken to further the


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Furthermore, cross-border investment could alsobenefit from a multilateral framework similar tothe World rade Organization. Meanwhile, the

IMF is well positioned to take the lead in guid-ing reforms in the international monetary sys-tem, including providing support for the designof coordination mechanisms for a multicurrencyregime that would limit currency volatility and,hence, help LDCs mitigate external exchange raterisks.

Major transitions such as the one currentlyunderway in the global economy always presentchallenges, because they involve large uncertain-ties and necessitate complex policy responses. Tetransition at hand is not just a matter of leaving

behind old economic paradigms. Rather, it isabout establishing the appropriate mindset andthe proper policy and institutional responsesindeveloping countries, developed countries, andmultilateral institutionsto facilitate the transi-tion to, among other matters, better developmentoutcomes. Developing countries have made con-siderable progress in integrating themselves into,and expanding their profile within, the tradi-tional channels and institutions of internationaltrade and finance. But much work remains toensure that developing economies adapt to the

transition now under way in the global economyin a manner that allows them to share the burdenof system maintenance commensurate with theirincreased stakes in an open international system.It is also critical that major developed economiessimultaneously craft policies that are mindful ofthe growing interdependency associated with theincreasing presence of developing economies onthe global stage and leverage such interdepen-dency to derive closer international cooperationand prosperity worldwide.

disbursements by emerging economies push offi -cial development assistance to even greater sharesof gross national income in LDCs.

Te effect of an increasingly multipolar globaleconomy is likely to differ across countries, how-ever, and LDCsmany of which are heavily reli-ant on external demand for growthare at thegreatest risk of not being able to adapt to riskscreated by the transformation. LDCs that are netimporters of commodities and mineral resourcesmay face higher global prices because of increasedglobal demand for raw materials. Even in cases

where LDCs are net commodity or resourceexporters, export-biased growth in LDC econo-mies runs the risk of immiserizing growth. For

LDCs with floating exchange rate regimes, criti-cal elements of their response to a more multipolarglobal economy will be development of institu-tional policy frameworks, market microstructure,and financial institutions that can ensure thesmooth functioning of foreign exchange markets.

Multilateral institutions can play a role inushering in this new multipolar world by provid-ing technical a ssistance and promoting policy-learning forums that enhance understanding ofthe process of transition to a multipolar worldeconomic order. Efforts to raise awareness and

equip policy makers in developing countries withthe necessary policy tools and financial capacity

would help the policy makers to better positiontheir countries in response to expected futurechallenges and risks, while capitalizing on theircountries strengths and opportunities. Aid andtechnical assistance from international financialinstitutions to LDCs also have the potential tocushion the economic shocks and lessen volatil-ity in the LDCs economies as they seek to adaptto the global forces involved in this transition.


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Global Development Horizons 2011 13

Changing Growth Poles and

Financial Positions

THE GLOBAL ECONOMY OF 2025 ISlikely to look significantly different fromthat of 2011. odays emerging econo-

mies will, in real terms, account for 45 per-cent of global output,compared with about 37percent in 2011 and 30 percent in 2004. Tesecountries will account for about as great a vol-ume of international trade and investment flowsas the developed world, and the drivers of globalgrowth will be not only developed giants, butalso major developing countries such as Chinaand India, which are likely to experience rapidgrowth between 2011 and 2025. Emerging econ-omies also will hold a greater proportion of global

wealth, as measured by net international invest-ment positions (IIPs).

Shifts in global economic power are not new.

Troughout the trajectory of economic history,each phase of global growth has been driven bya small set of countries. From the start of Chinasang dynasty to the Ming dynasty (6001600),China was a dominant force in the global econ-omy, accounting for a quarter of its output and asmuch as a third of its growth. Te Renaissancesaw the beginning of the rise of economiesin Western Europebeginning with Italy,Portugal, and Spain and then, with the advent ofthe Industrial Revolution, Belgium, France, andGreat Britainaccompanied by a transformation

of incomes, production, and trade. In the decadesfollowing World War II, the mutually reinforcingengines of American innovation and strong con-sumer demand propelled the United States to theposition of the worlds foremost economic power,

with Germany, Japan, a

Global Development Horizons 2011

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