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China Soon to Pass Japan as World's No. 2 Economy

How quickly are developing market economies gaining on the industrialized nations?

China next year will pass Japan as the world's second-biggest economy, according to a report out this week from Citigroup Global Markets (no public link). By the end of 2011, the economies of Russia and India are expected to overtake those of Canada and Spain in size. By 2020, India will surpass Germany, France and the U.K. Within the next couple decades, three of the world's six largest economies are likely to consist of emerging markets (click on chart at bottom to expand). Even so-called frontier, or pre-emerging, economies are starting to draw investment.

The U.S. is understandably preoccupied with its own financial and political dramas. So it's easy to lose sight of the historic transformation underway in the global economy. This shift has important effects.

Most obviously, as emerging markets develop, fast growth in Asian infrastructure, investment and consumer spending is becoming a key driver of global growth. Perhaps more important, the ascent of countries like China and India, with their relatively closed economies, could change the thinking about what economic models are best at nourishing growth and protecting countries from financial shocks. Citi states:

If "excessive financial liberalisation" helps explain the 1990s emerging markets crises and the developed-country crisis of 2008-9, then we might enter a period where capital controls and constraints on global credit cycles become a more visible facet of the global financial architecture.
Of course, making accurate long-term economic predictions is notoriously difficult. And events on the ground have a habit of making hash of such forecasts (Dubai World, anyone?). For instance, soaring real estate, stock and other assets prices in the emerging world suggest a growing Asian bubble (I'll present some interesting data on that development in a later post.)

Still, the scope and momentum of these trends are clear.

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