The 2 major factors driving geo-economic competition

The competition between states in the geo-economic era will increasingly be driven by a quest for markets rather than national resources. This is a major development.

During colonial times, competition revolved around direct control over land and sea, both for extracting resources and for promoting long-distance trade with colonies on preferential terms. As colonies became independent, an ideological rather than economic contest took its place. Once the Cold War ended, oil emerged as the big driver of competition, creating new alliances and drawing the United States into the security of the Middle East.

Today, as the world economy suffers from the after-effects of the financial crisis and many previously stable economies are reeling under the pressure of slow or no growth, the nature of strategic competition is changing again – due to two major factors.

First, resources are becoming cheaper, due to the shale gas and oil revolution, and other technological advancements that are reducing dependence on traditional suppliers. Second, the economic and demographic growth – as well as human capital development – in emerging markets makes them an important source of global aggregate demand and of relatively cheap qualified labour.

The interests of modern multinational corporations underpin the shift from the strategic competition for access to resources to the competition for inroads into new markets. Due to the breakthroughs in information and communication technologies – as well as more efficient transportation and logistics – these corporations have become truly global, able to invest and allocate the production of goods, services and even individual production tasks across continents.

This has shifted the strategic space of the natural resources competition to a competition for markets. The United States’ outreach in recent years to India, the evolving relationship between the US and China, China’s infrastructure investments in Africa, and Russia’s attempts to penetrate oil-rich Venezuela are all signs of the same phenomenon.

The main law of the new race is access to large markets, which often have large, young populations as well as a burgeoning middle class that enjoys increasing purchasing power.

The need for this access is twofold. Those who want to win in the new world should invest in skills. Those who want to provide incentives for human capital accumulation should assure access to a large (preferably global) market. Thus, accessing markets to make production more competitive by possible outsourcing to cheaper skill centres and having large middle class markets to sell products in are driving this new trend.

The winners of this new strategic competition are primarily the countries with growing per capita incomes and large and growing populations – mainly China, India and several large countries in Sub-Saharan Africa. The highly skilled citizens of the developed world are to gain as well as they become more productive in managing larger corporations and creating new technologies for larger markets. Countries and corporations that are adept at building inroads into new markets through their control over social, economic and communication networks will stand to benefit from these growing markets.

At the same time, the producers of natural resources are likely to see their power eclipsing, so oil rich countries such as Saudi Arabia, Russia and Iran stand to lose. And so are the medium-skilled workers in the Organisation for Economic Co-operation and Development (OECD) countries who now face competition from the cheaper-qualified labour in emerging markets. Countries that are unable to provide security and stability for economic enterprise and foreign investments will also be marginalized from this new wave of globalization.

All China could do during the 2011 conflict in Libya was to evacuate its thousands of workers from the country. The low-skilled workers in developed countries are still protected from this competition, as their jobs are not yet outsourceable. However, technical progress may threaten them through automation.

The report, Geo-economics: Seven Challenges to Globalization, is available here. 

Authors : Sergei Guriev, Visiting Professor of Economics, Fondation Nationale des Sciences Politiques and Hina Rabbani Khar, Minister of Foreign Affairs of Pakistan (2011- 2013).

Image: Flags of different countries fly from posts on the Uyuni salt lake, which holds the world’s largest reserve of lithium, located at 3,656 meters (11,995 ft) above sea level in southwestern Bolivia, November 6, 2012. REUTERS/David Mercado