Over the past decade, a group of emerging and developing economies has been leading the way in terms of growth and development, shifting the world’s economic centre of gravity. Global growth in gross domestic product (GDP) in the last ten years owes more to the developing world than to the advanced economies. If current trends continue, developing countries will account for 57% of world GDP by 2030. Dynamic economies, especially the Asian giants, China and India, are powerful engines for economic growth, and their role has been confirmed by their contribution to the global recovery from the financial and economic crisis.

Perspectives on Global Development 2010 is the product of a collaborative effort by a number of professionals inside the OECD Development Centre. Javier Santiso had the initial inspiration, while Helmut Reisen was responsible for developing the core concept. The report has been prepared under the direction of Andrew Mold and Johannes Jütting by a team comprising Helmut Reisen, Juan Ramón de Laiglesia, Annalisa Prizzon and Christopher Garroway de Coninck.

Major events are often misunderstood when they occur, and their relevance underestimated. Perspectives on Global Development: Shifting Wealth aims to avoid a costly lag in recognising the new geography of growth – a structural realignment in the global economy at the opening of the 21st century. The seeds of this change were planted over the last 20 years. Billions of people have entered the global market economy – as workers, consumers and investors – and economic catch-up has lifted hundreds of millions out of poverty. The financial crisis, far from reversing this process, has accelerated it; many emerging economies came out of recession faster than OECD countries.

In 2009 China became the leading trade partner of Brazil, India and South Africa. The Indian multinational Tata is now the second most active investor in sub-Saharan Africa. Over 40% of the world’s researchers are now in Asia. As of 2008, developing countries were holding USD 4.2 trillion in foreign currency reserves, more than one and a half times the amount held by rich countries. These are just a few examples of a 20-year structural transformation of the global economy in which the world’s economic centre of gravity has moved towards the East and South, from OECD members to emerging economies, a phenomenon this report calls “shifting wealth”.

The global economy has undergone a structural transformation in the 20 years since 1990 that has shifted the world’s economic centre of gravity away from the OECD and towards the emerging economies.1 Particularly over the last decade, poles of strong growth have emerged in every developing region. Economic growth has been most visible in Asia, driven by the strong performance of China and India, but it has not been confined to that continent.

The resilience of the developing world during the worst financial crisis of the postwar era highlights the importance of the economic activity taking place outside the core OECD countries. In fact, growth in the advanced economies has been outpaced by that of the developing world for more than a decade. The traditional split between North and South makes little sense in an increasingly multi-polar world where the largest and most dynamic economies may no longer be the richest, nor the world’s technological leaders. This chapter describes the new geography of global growth. Evident in this is the heterogeneity of the South: many developing countries are beginning to catch up with the living standards of the affluent, others are struggling to break through a middle-income “glass ceiling” and some continue to suffer under the weight of extreme poverty.

China and India’s sustained growth and large populations are reshaping the world economy. Their newly felt scale is affecting global markets for labour and commodities. New demand has raised the price of both oil and industrial metals. The labour shock of China’s entry into global markets has depressed low-skill wages globally, though the continuing shift of its export mix to higher-technology goods increasingly impacts middle-income countries. Asset accumulation by the Chinese public sector has raised the country’s global cyclical, financial and macroeconomic importance. Variations in China’s output gap have growing repercussions on global interest and exchange rates. Reserve building there and elsewhere contributed to macroeconomic imbalances and the mispricing of financial risk on a global level. Socio-structural explanations for China’s saving surplus mean monetary and exchange rate tools will not be enough for rebalancing. There is also a need for an increase in China’s consumption rate, perhaps through reforms in its social, pension and family policies.

The growing dynamism of South-South economic flows is an essential element of shifting wealth. Trade is rising fast both as part of extended global production networks and to satisfy the demands of a growing middle class. South-South trade can be positive for development but capturing maximum benefits requires an active policy approach and recognition of its changing characteristics. Simulations contained in this chapter suggest that there are very large welfare gains to be had from deeper liberalisation of South-South trade. Shifting wealth is also making the South a bigger player in both foreign direct investment (FDI) and aid. South-South FDI has been rising faster than North-South flows as firms in Brazil, China, India, South Africa and the East Asian tigers have gone multinational. Though still relatively marginal players, Sovereign Wealth Funds (SWF) are new protagonists in South-South financial flows. Some developing countries considered traditionally as aid recipients are becoming important donors themselves, going beyond the technical co-operation that traditionally characterises South-South interaction in this sphere. Their emergence is increasingly challenging existing modes of aid delivery and blurring the distinction between private flows and official ODA.

Since 1990, the number of poor people living on less than one dollar-a-day has declined by nearly half a billion. High growth in the converging countries played a major role in this decline, though poverty also fell in a number of poor and struggling countries. In fact, improvements in health and education were largely independent of growth. The pace and pattern of growth as well as initial country conditions matter for how much growth turns into social development. The technological and structural changes underpinning shifting wealth are often accompanied by increases in within-country inequality. While high inequality can limit poverty reduction, the good news is that today an increasing number of countries actually have the resources to address distributional challenges and foster social development.

The massive transfer of manufacturing capacity from OECD members to the developing world is one of the most striking changes in the global distribution of industrial activity over recent decades. Against the backdrop of shifting wealth, this chapter focuses attention on some of the major characteristics of the growth process in converging countries, particularly on their ability to absorb technologies and generate new ones. Shifting wealth has been accompanied by a growing technological divide between those developing countries which are capable of innovating, and those which seem not to be. There are several different channels through which technological generation and acquisition can take place – upgrading of human capital, R&D, FDI and trade. To meet the challenge of achieving competitive advantage, policy makers in developing countries must promote effective policy actions that help domestic firms absorb state-of-the-art technology and management know-how. However, this requires a far more active government policy to create an enabling environment than typically exists in most poor and struggling developing countries today.

Developing countries face novel policy challenges in the world’s new economic and social landscape. With the growing dynamism of large developing economies, development strategies need to be re-assessed to reflect new opportunities and risks. Specific attention should be paid to national policies focusing on foreign direct investment, resource management, agricultural development as well as social protection. Increasing South-South co-operation and interactions are prominent in all these areas. South-South peer learning is a useful tool for developing appropriate policies.

Some responses to shifting wealth cannot be made unilaterally, but need collective action. The existing global governance architecture was created following the Second World War and needs updating. Evolution can be seen in the replacement of the G7, first by the G8, then the G8+5 and now by the G20. Originally intended to be a shortterm response to the financial crisis, it has in fact become the new forum for discussions on international economic matters. The emergence of new donors such as China, Saudi Arabia and India also reveals the need to re-think development cooperation. As an example of the growing need for collective action, whether at the multilateral, regional or bilateral levels, this chapter focuses on trade policy. Reducing barriers to South-South trade, whether tariff or non-tariff, is an area for mutually beneficial action. Technology transfer between developing countries – through cross-border clusters of specialisation and co-operation along the global value-chain – is another potentially fruitful area for collaboration.