Financial Crisis of 2008 and Shifting Economic Power: Is there Convergence

Abstract: This paper analyses shifts in economic power over the last almost five decades. Developing countries and regions have increased their share of incremental world income and incremental world exports over this period. However, there is very little shift in the relative rankings according to size of GDP of the 25 largest economies in 2011 over these five decades. The economies of Korea and Brazil have become relatively much larger; the other changes have been minor. The rank correlations between the ranks over the years are very large showing that there has been little change in the rankings. Also, the GDP and GDP per capita of other countries and regions have increased relative to the US but this increase has been slow, particularly after 1982. The GDP of most of the large developing countries has increased relative to that of the US but far fewer have increased their relative per capita GDP suggesting slow rates of growth of productivity and limited structural change of shift in economic activity from low productivity to high productivity sectors. We also aggregated 20 indicators to form an index of economic power. Again we see that there has been little change in the rankings according to this index. We also measured the distance of individual countries from the US on the basis of these indicators. We find that most countries had been converging on the US but very slowly. There is no evidence that the 2008 financial crisis has resulted in a hastening of the decline of the US.

Keywords: Financial Crisis, Economic Power, Changing Economic Power, Convergence.