Dawn of a New Economic Order? the Western Dominance of the World's Economy Is Being Challenged by a Small but Powerful Collection of Emerging Markets Led by China, Brazil and India. the Economic Map of the World in 50 Years' Time, Says Our Columnist, Will Be Very Different from What It Is Today

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While the countries which form the Organisation for Economic Co-operation and Development (OECD) have enjoyed virtually unchallenged control of the world's economy since the industrial revolutions of the 19th century, emerging markets are now beginning to challenge the status quo.

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The term 'emerging market' was first suggested in 1980 by the International Finance Corporation (IFC), the private sector arm of the World Bank, to describe developing economies with exceptional potential for rapid growth. Over the past two decades, most emerging markets have transformed their markets and improved their economic performance.

The Economist magazine estimates that the total output of emerging markets, led mainly by China and East Asia, now represents more than half of the world's gross domestic product (GDP). Lars Thunell, executive vice-president of IFC, is quoted as saying: "Emerging markets as a group have proved they can sustain high growth and attract capital. There is tremendous dynamism."

According to the International Institute of Finance, a US-based association of private banks, net private capital flows to developing economies last year reached a record $358bn, more than four times the amount of official development assistance.

"It is as sweet as it gets" for emerging markets, says the Wall Street bank Morgan Stanley, forecasting continued robust growth this year, up 6.6% and improving on the 6.4% recorded in 2005. Moreover, bullish sentiment prevails in the global capital markets, including among long-term private and institutional investors, for emerging markets. The US firm, Emerging Portfolio Fund Research, reckons that emerging market equity funds last year attracted $16.5bn, a fivefold increase on 2004 inflows.

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Encouragingly, South Africa's stock market was a lucrative destination for investors, attracting a record net R50.2bn ($7.96bn) of foreign portfolio investment in 2005. Earlier this year, global consulting firm Mercer conducted a survey of 157 fund managers with a total of $20 trillion under-management and found that the majority expected a 9% annual return from emerging markets to the 7.6% forecast for developed markets.

Strong indicators

The growing clout of developing economies is evident from trade and financial statistics. In 2005, the emerging markets' combined GDP rose (in current US dollar terms) by $1.6 trillion, outpacing the $1.4 trillion increase of advanced economies. Importantly, the expansion is global--in fact, China and India together accounted for just 20% of the total increase in emerging markets' GDP last year, with important contributions from the newly industrialised Asian economies (South Korea, Taiwan, Hong Kong and Singapore), Middle Eastern oil-exporters and Africa, which posted real GDP growth of 5%, according to the Paris-based OECD.

The emerging market's share of total merchandise exports has surged to 42%, from 20% in 1970, accounting for more than half of the growth in global exports between 2001-05. Thus, the advanced economies' trade with emerging markets is expanding twice as fast as their trade with one another.

Over 50% of the US, the eurozone and Japan's total exports are now made to developing countries. Meanwhile, the IMF's data shows that the combined current-account of all emerging markets shifted from a deficit of $88bn in 1996 to an estimated surplus of $410bn last year. Concurrently, many have accumulated huge foreign exchange reserves--emerging markets now hold about two-thirds of global forex reserves, while their average ratio of external debt to exports has declined from 174% in 1998 to 82% last year.

Three external factors, however, have helped to steer emerging markets on a higher growth path in recent years: export-led growth fuelled by strong US import demand, rising commodity prices (especially crude oil and metals) and low interest rates, particularly useful for South America, where the debt-to-export ratio exceeds the emerging markets' average. …