What Has Fundamentally Changed in the World Economy

Emerging economies may have a bigger impact on the American economy and in particular they are powerful enough to take away the lower value added jobs in the tradable sector to an extent that may have an impact on work opportunities for a subset of our fellow citizens.

What’s been going on in the world economy since World War II – it’s a wonderful story with America in the lead. The international community set out to open up the global economy. That turns out to be the key element that allows developing countries to grow at very high rates, the way they have. And because many of these countries were poor and relatively small, you could grow at very high rates and they didn’t have a very big impact on the global economy, but you just know that over time, that impact is going to get larger and larger, not because the growth is higher, but because the size is bigger.

So for example, China passed Japan as the second largest economy in the world. Thirty years ago when they reformed and adopted a market-oriented approach to managing their economy, they were growing at 8%-9%, but it was so small, even with a population that size that it just had no effect whatsoever on the global economy. Now if China grows at 10%, with a six trillion dollar economy, it’s just an enormous increment in global GDP and demand and all kinds of things.

So, I think in America we got in the habit of thinking that this high growth over there in the emerging markets was really sort of separate, something else. And because it didn’t have a big impact on us, it was easy to kind of think that way. And our economy hummed along in its innovative way, creating new technologies and products and all of that is true. That’s exactly what happened. We grew at 2.5% to 3%, Europe did too.

But now I think we are at a point where the emerging economies may have a bigger impact on the American economy and in particular they are powerful enough to take away the lower value added jobs in the tradable sector to an extent that may have an impact on work opportunities for a subset of our fellow citizens. And that’s something to be taken seriously. But I don’t think our habits of thought have caught up with that reality yet.

In Their Own Words is recorded in Big Think’s studio.

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