The state of globalization: a European insider surveys the scene.

• Author: Stark, Jurgen

What has changed about the global economic structure since the early 1990s? An increasing proportion of economic activity is market-determined. Within a period of only fifteen years, major centrally planned economies have turned into market economies and several strongly regulated emerging market economies have implemented radical reforms.

All of this has stimulated very strong and ongoing growth dynamics. Consolidated and internationalized competitive conditions have ensued, continuously requiring adjustment from all economies. This challenge is accompanied in many advanced economies by demographic changes which require additional efforts.

Under realistic assumptions, the United States and Asia will remain the centers of gravity of the global economy in the coming years. However, without changes in the conduct of economic policy, this would also mean that the existing global current account imbalances would become even more pronounced, with an increasing risk of sudden exchange rate and financial markets movements.

Moreover, enormous challenges increase the vulnerabilities connected with current global imbalances. Changes in the global economic structures in the wake of globalization are particularly important. Production processes can be regionally fragmented to a greater extent than ever before. The number of tradable goods has risen sharply and many services have become tradable. The financial markets are closely integrated on a global scale. Economic policies, but also tax systems and regulations, are competing with one another internationally for capital investment and savings.

The number of countries affected by today's globalization processes is far larger than the number involved in earlier phases. This applies particularly to the global economic integration of emerging markets and developing countries. The shares which these countries have in the world's goods markets, direct investment flows, and portfolio inflows have expanded considerably.

The increasing integration of large emerging economies into the global economy means that the volume of world trade and global growth prospects will continue to rise. The so-called BRIC countries--Brazil, Russia, India, and China--are arousing particular interest in this respect, with China and India assuming a prominent role.

While China has established itself as the intra-Asian platform for the production of labor-intensive goods--especially for the United States--India's strategy is based on the export of services. However, China and India import a considerable volume of goods from other countries, particularly in Asia, and record only small current account deficits.

What obviously differentiates China and India from other emerging economies is their sheer size. Their combined population is roughly 2.5 billion, representing more than one-third of the world's population. The...