In debates on the direction of the global economy, I have noticed one concept has been overused and one has been underused. The first overused concept is globalization. The second underused concept, one less talked about and very poorly understood, is regionalization.
Most discussions on the world’s future -- of U.S. growth, the direction of the Eurozone crisis, and the China slowdown -- are clocked into a mindset of globalization. In other words, if the Eurozone recession spreads to the U.S., the over-simple globalization discussion says all regions outside Europe feel pain one-for-one. If China slows down, the globalization discussion says all regions outside of China feel pain one-for-one. Ditto for the U.S. growth influence on these two regions.
To regain some balance on the subject of ‘the world’ in your discussions, consider these facts. I decided to use Purchasing Power Parity Adjusted GDP numbers held in international dollar terms to get a fresh ‘Regional’ perspective. The following was dredged up from IMF statistics. That is as close as Apples-to-Apples as I think we can get.
What did I find out?
(A) The entire Asia region comes in at $26T. China itself is going to be a $13.5T economy in 2013. Japan comes in at $4.7T. India comes in at $5.0T.
(B) I put together a ‘U.S. region’ to include the U.K., Canada, and Mexico. This entire ‘U.S. region’ comes in at $23T. The U.S. nation itself is going to be $17T in 2013, the U.K. at $2.5T, Mexico at $1.9T, and Canada at $1.6T.
(C) The Euro Area and Central and Eastern Europe come in at $14T. Germany is at $3.3T.
(D) Latin America comes in at $7.6T. Brazil is at $2.6T.
This GDP data sets us up to better explore the second concept: Regionalization.
Regionalization can lead to sharper insights on differences among world regions than Globalization.
One key I have noticed about Regions?
Each one has a Sun and a Solar System. In Asia, China is 50% of the GDP story. In the U.S. sphere, the U.S. nation is close to 75%. In Europe, Germany is 25%. In Latin America, Brazil is 34%.
For example, the Asia region of the world is growing quite strongly. But within Asia, the dominant country is shifting from the previous leader, Japan (20%), to the new leader, China (50%). Japan’s current fight over small unimportant islands with China and South Korea, are good examples of what is happening inside Asia now. Throw in a sovereign leadership shift, and you see this region more clearly.
In this Asian space, and in any other region, regionalism intensifies interactions. Minimizing space economics inside a region is always more favorable than in a global framework. Think about shorter flights for businesspeople, similar cultures and languages, lower transport distances, and easier logistics. More Chinese, South Korean, and other Asian growth mean disproportionally more Asian regional activity, and so on and so on.
Seen through the prism of regionalism, the Eurozone crisis is clearer too. Germany as a ‘Sun’ has only 25% of the GDP strength -- the lowest among world regions. So this region is inherently the most unstable. No surprise the Eurozone currency crisis has been protracted. Any European macro decision is amplified by the political instability inside the Eurozone region itself.
How about the ‘U.S. region’? Here, we see the key strength of this region vis-à-vis the others. The U.S. ‘Sun’ is 75% of the story. Decisions and directions are much more coherent in this region.
Finally, what about Latin America? Brazil as a ‘Sun’ has 34%, or a third, of the region’s GDP. No surprise that Latin America is more like Europe, with protracted decisions and more instability.
Does this sound like what we see? I think so.