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The Worlds Economy And Power Economics Essay

The world’s economic balance of power is shifting rapidly, and the trend has only been accelerated by the recent global recession. China remains on a path to overtake the United States as the world’s largest economic power within a generation, and India will join both as a global leader by mid-century’.

Uri Dadush and Bennett Stancil (The world order in 2050, February 2010, Carnegie Endowment for International Peace)

Uri Dadush is senior associate and director in Carnegie’s new International Economics Program, Bennett Stancil is a junior fellow in Carnegie’s International Economics Program.

“Self–regulation is finished; laissez-faire is finished”

Nicolas Sarkozy ,The President of France .

“For the first time there was a genuine dialogue between many of the developed countries and the emerging economies, it is a clear indication that the balance of power is shifting in favor of emerging economies”.

Dr Manmohan Singh (Prime Minister of India , after the 2008 Washington Summit of G20 countries)



Twenty first century is the period of globalization. In a globalized world all countries are interdependent. Market centric political policy is the characteristic feature of this globalized world. Countries are dependant upon each other for their economic advantage and this economic factor is the soul of the post modern nation state. Economic interdependency is not eliminating the inner essence of a state and dose not compromise the sovereignty, but the states are competitive for their own advantage against and along with multi national companies some of them are economically sound than many of the states. States are sovereign; because of this fact the super sovereign control over the state is not possible. In a market dominating politics the states are not only compete each other for their economic benefit but also the powerful states make domination above the weaker. The control of the economy in an international level through the institutional set up as the World Trade Organization (WTO) is not possible to control but it becomes itself as an arena for domination by the powerful states. In this essay I am analyzing the changes in the domination after the recent financial crisis which emerged in the United States. The emergence of the Asian powers as important players in the global economy would be looked at in wake of the financial crisis. It would be attempted to substantiate how the economic crisis helped the Asian giants like China and India. This shows the prospectus of much bigger role for the emerging Asian powers in the global economic system as a balancer as well as the goal setter.

This essay is not meant to the study of the institutional domination or changes in the institutional set up with the ushering in of the international financial crisis. Through this essay I simply analyze the changes in the domination of Asian states as a powerful state in international economy and policy making. This globalized world is an organized world though it seems to be chaotic. Many kinds of organizations are working in this international realm. Most of the time, these kinds of organization are being the place of power display and tug of war by the powerful state. My argument in this essay is, the 2007 financial crisis has given some more status to developing Asian countries, namely India and China.

The paper starts with the study of the international financial crisis and chalks out the major features, causes and consequences of the same on both developing and developed countries. It would also discuss how it derailed the banking system in the US and other countries and how the panic spread like wild fire. Then a discussion of the Asian powers and their dynamics are discussed. This is to place these countries in their proper position and to assess to what extend they were able to with stand the crisis. This follows with a discussion of the crisis in Asia and how the incorporation of the Asian economy to the global economic system led to the replication of the crisis in Asia. A discussion of the effects of the economic crisis in the developed countries and how it touched the life of the people in all walks of the life. But the thrust of this paper would be how despite these factors the Asian powers could retain and augment their status in the global economic system when the whole developed world was reeling under its onslaught.


The financial crisis, which started in 2007 with the collapse of the American banking system and affected the whole world, is the worst one after the great Depression of 1930s. Mistakes of the corporatist financial system, especially American, were the main reason of the crisis. The crisis changed the flow of economy channeled to other roots as it was clear from the words of French President Nicolas Sarkozy when he said “self–regulation is finished; laissez-faire is finished”. [i] The crisis fuelled the rapid rise of unemployment and food price rockets keyed. Number of the companies which were proclaimed to be bankrupt went very high. All most all developed countries got affected by this crisis and the consequences were felt there more than in the developing world.

The present financial crisis has hit the US harder than Hurricane Katrina, and WaMu (Washington Mutual) bankruptcy only reiterates this. ‘the US reeled under the news of the biggest bank failure in its history, as federal regulators seized the largest American savings and loan institution, Washington Mutual (WaMu), which came to symbolize the excesses of the mortgage boom. Regulators brokered an emergency sale of the assets to JPMorgan Chase for $1.9 bn. As expected, global markets plunged. WaMu’s assets were $307 bn and it was also the sixth largest US bank, behind Bank of America’ [ii] . The companies like Lehman Brothers Holdings Inc. (LBHI), Delta Airlines Inc, WorldCom Inc, Pacific Gas & Electric Co, and General Motors etc. were included in the list of companies which were given bankruptcy notice in the period of financial crisis in America. Most of these companies were part and parcel of the American economy. Most of these companies collapsed despite the fact that they were hardened with the long experience of more than a century.

The crisis started in American housing market and it spread all over the world and affected all major developed countries, especially Europe and Japan. It does not mean this did not affect the developing countries or the third world. Though the financial crisis affected totally its impact was not the same in developed and developing countries. Developing countries like China and India immediately tackled the threat of international financial crisis with well planned policy in the economy and the market. In short, the international financial crisis, which started in 2007 and still continues, strongly affected all developed economies. The United States, Europe and Japan exhausted fighting with this international economic crisis. This crisis led to a kind of imbalance of western economy in international market system. Developing countries, especially Asian developing countries, India and China kept a balance in international economic system and they continue their growth rate with a small variation. Thus the fall of western powers has given a chance to the raise of new Asian powers as the vacuum in the international market created by the withdrawal of the western powers from many areas was filled by them.

Developing countries were tied strongly with the US economy and as a result the crisis creped to these counties very easily. Millions of peoples, all over the world, had lost their job. The International Labor Organization (ILO) estimates that as much as 231 million unemployed were there in the year of 2009 only [iii] . The Director General of the ILO, Juan Somavia of Chile, says that the financial crisis has become a ‘global job crisis.’ He reports, “The global unemployment could affect 231 million people in 2009, an increase of 52 million as compared to 2007. [iv] ” Because of this rapid growth in unemployment social system became disordered in many of the places. Thousands of people in the United States had lost their house because of their inability to pay the loan.

The recession and resultant inflation affected not only the economic system but also it affected the normal life of the common people totally. Sudden price rise of food and primary goods and increase of unemployment created some social discontent and tension all over the world. Thus the international financial crisis developed as the social and political crisis and its waves spread bottom to top all over in the society and the state. Governments are sincerely trying to recover the crisis and they spent billions of money to market for recover its stability. But still the recovering process is not finished and many of the economists are says that it will take two more years of time for fully recover the balance and for start to maintain its stability. In short the first international financial crisis of the twenty first century was the worst financial crisis after the great depression of 1930s and it affected in the fully the whole society.


Asia, the most populated continent in the world, is going to be the power house of the world as Rasgothra mentioned, “The post Cold-war world is Asia-centric and a new power dynamic is taking shape in and around the old which will define 21st century world order” [v] . The analysis of Asia in its wholeness is very difficult. That’s why this essay is concentrating only on two of the major developing countries in Asia which are India and China.

China and India are the most rapid developing countries in the world. The Chinese economy is the second largest in the world while India is ranked four according to Purchasing Power Parity (PPP) calculation.

If we look at the capacity of these two countries, India and China we can see a number of points to assume that these countries have the ability to be global powers in the days to come. The military capacity as well as the highly organized military set up of both the countries is a thing to be reckoned and is competent enough to lock horn with any army in the world. That is in addition to the fact that both are nuclear capable states in the world but seen globally as responsible and trust worthy in keeping them safe. China is already a permanent member in the Security Council of the UN and India is trying its best to garner support in the international level for similar status with commendable success.

Unlike China, India has good democratic set up. The biggest democratic country of the world is making huge strides towards inclusive development despite some stray untoward happenings. China is a communist state but they have taken many market centric reforms to compete in the international market against other great economic powers and their ideology was trimmed to suit to the market requirements. These two countries are enjoying higher rates of economic growth even in this crisis period. A large amount of strong middle-class is the highest benefit of these two countries.

Contemporary international system is listening to the voice of these Asian countries as prudent on issues which are affecting the whole world. If we look at any international problem we can see independent opinion of these countries and they are becoming overwhelmingly louder and vocal. The emergence of BRIC (Brazil, Russia, India and China) as the organization of four largest developing countries makes clear that these countries are resolute to take corrective measures against the prevailing global hegemony. “Unlike Japan which is a one-legged economic giant, India and China are “complete” great powers in international politics not allied or the junior partner to any superpower, and underpinned by economic, military and cultural strength” [vi] . The foreign policies of these countries are reforming for a new competition against the prevailing hegemonies.

Despite the similarities, as the competing powers for the leading role in international system, between India and China there are strong differences and controversies and their developmental projects have two different trajectories. The democratic set up is notwithstanding the myriad shortcomings has given India a cutting edge over China in terms of achieving its internal and external goals. Chinese communist system is not giving full scale freedom for its citizen as democracy provides and it has been subjected to scrutiny and criticism. Absence of people’s participation in country’s policy making in a democratic and transparent manner is the real weakness of this country. The movement of India—China relation was and is not always a smooth one. The controversy about boundaries between them is an unresolved issue and is always an irritant in the relations between them. India have an uncertainty regarding the relations between China and Pakistan. This is because Pakistan has not improved much in the eyes of the Indians and still is seen by many as a potential destroyer of India when and where it gets a chance. Chinese developmental assistance in the Pak occupied Kashmir has raised the apprehension and hence resistance from India against China recently. Thus the controversies and the differences in the political systems, to an extent, are affecting the smooth run of relation between these countries.

The competition of India and China for being global powers is not limited in economic and political affairs, but it flows to all scientific technological and military affairs. On September 2008 India became an internationally legitimized nuclear power with the signing of the India—US nuclear agreement. In the same month China became the third country, after the United States and Russia, to send its astronomers into space and conducted space walk. In the following month, India successfully launched its first unmanned mission to moon (Chandrayaan 1), and India decided to conduct its following parts in the near future and planed to send a man to moon by 2020 (Lam and Lim 2009). Thus India–China competition in science and technology and military modification is going well for become a super power. The famous political scientist Minxin Pei says that “At most, Asia’s rise will lead to the arrival of a multipolar world, not another unipolar one. [vii] ” Asia is nowhere near closing its economic and military gap with the West. The region produces roughly 30 percent of global economic output, but because of its huge population, its per capita GDP is only$5,800, compared with $48,000 in the United States. Asian countries are furiously upgrading their militaries, but their combined military spending in 2008 was still only a third that of the United States. Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American. The Chinese need 47 years. For Indians, the figure is 123 years. And Asia’s combined military budget won’t equal that of the United States for 72 years [viii] .

The predictions about international relations are not shrinking in this analysis. The international system is not a stable one; it will change with the variations of this system as the entire history shows. That’s why the prediction of international system with the sharp statistical analysis has not any guarantee to become truth. But the contemporary movement of Asia, especially India and China, in the international system is giving signals about the days in which Asia leads international system.

The signs of the development of these countries as the emerging global power were seen many times in recent past. In 2008, China put on a spectacular display and a great feat of organization at the Beijing Summer Olympics and succeeded in stunning and wooing a global audience. The Beijing Olympics, exactly, was a historic moment for the People’s Republic of China. Beijing’s capacity of organization and management was visualized and displayed through the Beijing Olympics. The rapid growth of the market value of the Indian Premier League (IPL) as reported by the media is the best example to show the capacity of India to influence the world audience. India changed the taste of cricket of the international cricket fans through the IPL T20. Though the power of nations could never be assessed by sports and athletics but it is a pointer to the capacity and caliber of a nation as well as its advancement.


The global financial crisis which started in mid-2007 and worsened in October- 2008 resulted in major falls in the US stock market. Asian markets are closely tied to those of the USA, particularly those of the more industrialized countries, and therefore suffered losses. Economic growth of the Asia was slow in the crisis period but India and China retained relatively higher rates of growth. The financial crisis started in 2007 comparatively affected less in the continent of Asia than America and Europe. But the wind of the crisis was not silent in Asia; Japan is one of the countries most affected by contemporary financial crisis and it had lost its position of second largest economy after the United States and China replaced its post as second largest economy. Now, Asia, the fastest developing continent immediately is recovering from the crisis and going back to the stable condition prevalent in the pre-financial crisis. The Hindu columnist C P Chandrashekhar notes …“ As the International Monetary Fund’s Regional Economic Outlook released in October reports, “emerging Asia … has especially benefited from equity market inflows, which have not only exceeded those to other regions, but have also returned to levels prevailing before the crisis. External equity and bond issues by emerging Asian economies have also returned to pre-crisis levels, a much stronger rebound than in other regions.” [ix]

Asian developing giants India and China, to an extent, appeared cautious and cunning during the international financial crisis. They have given assurance about financial strength to stake holders to kept balance in stock exchanges. But in reality the strength of the crisis and American dependency for market has shocked to Asian stock markets. The Dubai crisis also affected the immediate recovery of the Asian economy from financial crisis. But the Economic and Social Commission for Asia and the Pacific (ESCAP) predicts 6.3 percent growth in Asia-Pacific region in the year 2010. The year end economic report of ESCAP says; “after generally efficient response to the global crisis by regional governments who briskly deployed looser monetary policies and fiscal stimulus packages to sustain their economies, however, the long-term recovery remains based on the ability of Asian governments to wind down stimulus packages at the right moment, prevent asset bubbles and to find new engines of growth to replace several years of likely weak demand from Western economies”.

The annual report of the Reserve bank of India says “Available information indicates that inward remittances to India have not been impacted significantly by the economic crisis.” Thus India was a less affected country by 2007 international financial crisis. The jump of China, from third to second largest exporting country shows that China was also a less affected country by contemporary financial crisis. Several Asian countries have built up healthy gov­ernment reserves, and solid export performance has helped their strong current account position. [x]

Asian economy is too much interconnected with American economy and because of this interconnection it failed to escape from the crisis wind. With the fall of American stock market Asian stock markets also fell down and became part of the crisis very immediately. Yet Asia was free from the credit problem as prevailing in America and Europe, it affected the recession strongly at the beginning time only because of this strong interdependency and interconnections. The 2008 year end report of the Asian Development Bank (ADB) said the financial crisis wiped $ 50 trillion off the value of financial assets last year, nearly $ 10 trillion those losses were in developing Asia alone (Asia excluding Japan). [xi]

The Overseas Development Institute says that the current financial crisis affects the developing countries in two possible ways; first, there could be financial contagion and spillovers for stock markets in emerging markets. The India stock market dropped by 8% in one day at the same time as stock markets in the USA and Brazil plunged. Second, the economic downturn in developed countries may also have significant impact on devel­oping countries. The channel of impact on develop­ing countries includes Trade and trade prices, Remittances, Foreign Direct Investment and Equity Investment, Commercial lending and Aid. Growth in China and India has increased imports and pushed up the demand for copper, oil and other natural resources, which has led to greater exports and higher prices, including from African s countries. Eventually, growth in China and India is likely to slow down, which will have knocked on effects on other poorer countries (ODI Background note October 2008). Thus the Asian economy was affected by contemporary financial crisis mainly because of its dependency on the developed world especially America and Europe. Because of the absence of credit problem most of the Asian countries started recovery earlier than all other developing and developed countries. Thus the Asian economies have given an expectation to world for recover from this imbalanced standing and to proceed further to empower all spheres of social life.


The developed economies were the prime victim of the first financial crisis of the twenty first century. American origin financial crisis spread all over the world and affected the balance of international economic system within a year. Globalized economy is more interdependent and because of this interdependency the flow of crisis was very speed and devastating. All major developed countries tasted the American born crisis and lost their economic strength in international system. The 2007 financial crisis mainly destroyed the balance of the economic system of the United States, Europe and Japan. Because of the collapse of these important developed economies the entire world were affected and suffered its consequence.

The crisis started with the boom in the American housing market and inability of customers to repay the loan resulted in the collapse of major financial institutions. The American economy which was standing in the balance of these financial sectors and the collapse these financial pillars affected total balance of American economy. If we note the major companies which collapsed with international financial crisis, we can see that how much this crisis affected the US economy. Bankruptcy of the WaMu(Washington mutual) on 26 September 2008 was one of the biggest collapse of banks in the history. It was the sixth largest bank in the US and its assets were $307 billion. Another important company was the Lehman Brothers Holdings Inc which was proclaimed to the bankrupt on 15 September 2008, and was 158 year old investment bank. This is the largest bankruptcy in the history of the United States with $ 638 billion in assets and was seen as the largest failure of an investment bank. These multinational banks not only affected the United States but its collapse affected all countries were these companies played dominant financial role.

As happened in the United States, all the major European countries and Japan faced the fall of many important industrial giants. These economic systems which were fully owned by the private individuals were needed the state assistance to move forward from that financial trap. Without the state assistant the system were not able to maintain its stability as prevailed until the crisis. The state using the taxes of the common people bailed out these companies paying millions of dollar, exposing the hollow claims of the market led economy. Thus the international financial crisis led to the state interference in these privatized economy and this in turn led the states to a huge financial debt. Because the market crisis reduced the income of states from the market and the inflation affected the money value. The financial crisis led the states to a political stalemate.

The analysis of the growth rate of the Growth Domestic Product (GDP) of the major developed countries shows that the reverse running of these economies. The GDP of the United States was 2.1%, 0.4%, -2.4% in 2007, 2008 and 2009 respectively. This shows the reverse root of the US GDP. In the case of Japan it is 2.3%,-0.7%, -5-7% in 2007, 2008 and 2009 respectively. In the case of European Union this is 3%, 0-9%, -4% in 2007, 2008 and 2009 respectively. [xii] This growth rate of GDP is enough to show that how much the financial crisis affected these developed countries. These reverse running economies are trying to recover and restore their previous status, but it will take years of time.

The failure of the trade policy of the western countries constrains them to rethink their practicing policy. They understood the truth that some kinds of state barriers are needed in an economic system. In a unrestricted market led economic system if any crisis happen – as happened in 2007– the government will lose more than what the state controlling economy incurs. Financial crisis spread to all major economies and its consequences were felt in the whole world because of the interconnections with each other in this globalized era.


As we have seen above, the first worst financial crisis after the great Depression of 1930s almost totally affected all developed countries. We have to remember the words of French president Nicolas Sarkozy, that the “the laissez-fare is finished; the self regulation is finished”. It is the failure of western neo-liberal economic policy, it is the failure of the leadership of West as the international economic giants, and it needs a new management and new policy implementation. The ‘tired economies’, America and Western developed countries and Japan, are becoming ineligibles for managing international economic system because of their weakness proved once in international economy with the emergence of the second great depression.

The failure of western economies to prevent the crisis never means that the mode of operation in those economies, I mean that the neo-liberal economic systems, is a full failure and those method has to be change. There is no chance in the foreseeable future of the emergence of another mode of economic operation in the international market and the prevailing system becoming irrelevant. The system which prevails in the international economic dealings and in the national economic dealings of most of the countries may not be changed but that will continue with some forms of policy changes and this policy changes will give more importance to developing economies in international market system. First signal of this policy change was visible in the 2008 Tokyo Summit of G8 countries. French president Nicolas Sarcozy, only days before the beginning of this summit, observed, “I think it is not reasonable to continue to meet as eight to solve the big questions of the world forgetting China, which has one billion 300 million people, and not inviting India, which has one billion people” [xiii] . But Japan and the United States were opposed to Surkozy’s suggestion. This was the beginning of the understanding of the importance of developing nations to take decision on global matters. The summit invited all major developing countries mainly China, India, Brazil, Mexico and South Africa. And the decision of the summit was one which formulated giving importance and satisfaction to all developing countries. From this summit western leaders recognized the relevance of developing world for the smooth movement of international system.

The achievement general agreement from the G20 Washington summit on 2008 was also one of the recognition of developing countries. After this on the press conference Indian Prime Minister Dr Manmohan Singh said “for the first time there was a genuine dialogue between many of the developed countries and the emerging economies”, he also added “it is the clear indication that the balance of power is shifting in favor of emerging economies”. Chinese foreign ministry spokesman Qin Gang said “the agreement was comprehensive, positive and balanced”. Thus the voice of developing economies, especially two developing Asian countries India and China are started to get more relevance in international conferences and the developed countries welcomed their active role in international decision making

The globalized world is an organized world. Many kinds of organizations are working here for achieving different kinds of goals. The role of international organization, in this period of globalization, is unavoidable. The influence of international organizations in the policy formation of a country is unavoidable. Thus, in this organized world the status of the country in an important international organization is influencing the status of the country in global level. Status in an international organization is helping to raise power in international level as the United States doing through United Nations and other international organizations. The rising status of the major developing Asian countries China and India were visible in the international summits which followed the 2007 international financial crisis.

The Washington summit of G20 countries and the Tokyo summit of G8 countries, both in 2008, are the best example to show the increasing global status the new Asian giants India and China.

China and India are the countries which have nuclear weapon and a well organized huge military set up followed by the United States. This military sufficiency is the advantage for these countries to become international powers but the very vast military is really becoming burden to United States because of its maintenance cost which is taking a good percentage of their GDP. Negative growth of GDP is depressing the United States, and the high growth rate and economic development are becoming advantage of this new Asian developing countries India and China. As the some writer’s opinion (whom they are saying the high population of India and China will affect their development) the vast population is not a burden for these countries, it is good for their development, if they use it sufficiently. Because of this large population of these countries are makes good domestic market for their economic development.

Economic strength as the highest developing economies of the world and military strength as the nuclear capable state , makes these countries are able to post in a high status in international system than any other ‘tired super powers’. These countries are recently founded a new kind of organizational power in international system with establishment of BRIC (Brazil, Russia, India, China) with the partnership of Brazil and Russia. In short, the lights of the development of India and China, as the global power are visible every where in international relation system. The Carnegie Endowment For International Peace writes in their essay ‘The world order in 2050’ that ‘The world’s economic balance of power is shifting rapidly, and the trend has only been accelerated by the recent global recession. China remains on a path to overtake the United States as the world’s largest economic power within a generation, and India will join both as a global leader by mid-century.’ [xiv]


The essay explored the ways of the Asian powers, India and China, are raising its global status and trying to become a global power. The development of the new Asian powers will not create a new unipolar or bipolar world, but it will create a new multipolar world. In this analysis one thing is clear that, if a new a multi polar system will emerge in international system in coming future as the Asia centric global order, it will not create each other competing global order but it will create more interdependent global set up. This argument is on the light of recent cooperation of the United States and the European with China and India. And India was always a responsible peace loving country and China itself says that they are responsible country.

Essay analyzed the chances, these countries –India and China– are getting in this international system after the wake up of the contemporary international financial crisis, to prove their status in international system. This essay given a vision to some major international summits which are held after the emergence of this international financial crisis and it noted that in that new occasions these developing countries are getting more importance than till they received. Thus the essay created a total picture of changes in international relations after the beginning of international financial crisis and presented the chances of the highest developing Asian countries, India and China, to become global power.

Financial crisis of 2007 was the real shock for the United States and the developed countries of Europe and Japan. They immediately fell to negative growth and the sudden collapse in the economy affected their political power and global status. But developing countries especially India and China which kept its high growth rate in a smaller variation in the crisis period and started immediate recovery from the crisis and which are running as the new global powers. In short fall of developed economy given immediate way to developing economies to increase its economic strength and through this their global status.

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