Rebalancing means more than finance

This year is expected by some to be one of global rebalancing. But the conception of what such rebalancing means is generally too narrow. The common understanding is that production will be brought more into line with consumption.

What this should mean in 2008 is that America will consume a little less in relative terms and Asia a little more. For the imbalance between America and Asia is the most important in the global economy.

One of the key mechanisms for such rebalancing is likely to be a continued decline in the value of the dollar. Americans will have to pay more for their imports and will have a greater incentive to bolster their exports. In contrast, Asians will have more of an incentive to increase their domestic consumption.

In investment terms the broad implications of this shift are clear. As Merrill Lynch has pointed out, in America the more export-orientated firms will become more attractive while in Asia the emphasis will be on domestic players.

However, there is another dimension to rebalancing. It will also prompt a greater weight for the key Asian economies, and emerging economies in general, in global affairs. The likes of China and India are unlikely to carry on accepting a subservient role.

Such a rebalancing will be between economic and political power. Political realities have yet to catch up with the rapid economic growth of China and India. But 2008 will likely see an acceleration of the trend for emerging economies to be taken more seriously in political terms.

The other side of this trend is for a decrease in the relative importance of America. Although it will remain the world’s pre-eminent power, it will not have the overwhelming weight it once enjoyed.

Britain is likely to be hit hardest by the rebalancing of economics and politics. British politicians of both main parties have long sought to project the country as a serious middle-ranking power. But they will increasingly find themselves edged out by the larger emerging economies.

Overall the trend will be for more non-white faces to play a leading role in global decision-making. To the extent this represents a shift to a more balanced world it should be welcomed.