Source: An increasingly multipolar world (GMT 6) — EEA
Driven by structural change, fast-growing workforces and trade liberalisation, developing regions are rapidly increasing their share of global economic output, trade and investment.
For Europe, this rebalancing presents competitive threats but also economic opportunities in meeting the demand of a fast growing global middle class. The emergence of a larger and more diverse mixture of major economic powers may, however, complicate global efforts to coordinate governance. And growing economic interdependence will make it harder to manage the social and environmental impacts associated with production and consumption systems.
Globally, economic power is shifting. Due to contrasting rates of growth, developing regions are gaining in importance and developed regions are becoming less dominant. These trends are linked to the process of structural economic development: the transition from agrarian societies, through industrialisation to service-based and knowledge economies.
In developed regions, industrialisation in the 19th and 20th centuries brought an unprecedented increase in economic output. Today, developing regions are undergoing the same transition but at much faster rates because they have been able to import and adapt existing approaches. In some countries, the process is already advanced; in 2012, the economic structure of East Asia and the Pacific was similar to the EU’s in 1970 (Figure 1)
In contrast to the rapid growth in developing regions, structural and demographic factors have slowed growth in the advanced economies. The increasing contribution of services to economic output is important, since many branches of the service sector deliver modest productivity growth . At the same time, lower birth rates mean that populations in many developed countries have stopped growing or started contracting, and labour forces are expected to decline further as the population ages (GMT 1)
Factors affecting convergence
Trade liberalisation has contributed to the rebalancing of global economic output. Access to export markets promotes structural economic change because national production is no longer limited by domestic demand. Instead, a country can expand output of goods or services that it can produce relatively cheaply, thereby boosting aggregate productivity. In developing countries, that often means increasing labour-intensive manufacturing.
The average level of tariffs on manufactured products in industrialised countries has dropped from 45–50 % in 1948 to an average of about 3 % in 2009 . World exports grew at an average rate of 7.9 % per year between 1990 and 2011, while global gross domestic product (GDP) increased by about 5.5 % (in nominal terms) annually 
Foreign direct investment (FDI) also contributes to structural change because, in addition to financing accumulation of productive capital, it is associated with the diffusion of technologies, skills, institutions and management expertise. Some developing countries have facilitated technology transfer and the transition to post-industrial economic structures though major investments in education and health (GMT 2)
While the processes of socio-economic development tend to cause economic productivity to converge across the globe, there are many uncertainties. Socio-political developments within developing countries — for example democratic processes and growing income disparities — are very hard to anticipate, as are the effects of shortages of skilled labour due to demographic changes – migration and ageing, for example. In terms of international relations, uncertainty surrounds the ability of emerging countries to develop economic cooperation mechanisms. Perhaps most important are the risks of geopolitical instability and military conflict.
Declining dominance of advanced economies
Projections of global GDP underline the increased economic significance of today’s developing and emerging economies. In 2000, the Organisation for Economic Co-operation and Development (OECD) member countries accounted for less than 20 % of the global population but 77 % of its economic output, but this is projected to fall to 50 % in 2030 and 42 % in 2050 (Figure 2). The EU’s share is projected to drop by around half between 2000 and 2050, falling from 28 % to 14 % 
In the short term, the financial crisis and subsequent economic stagnation in advanced economies has accelerated the global convergence of living standards (GMT 1). Even when steady growth returns to the EU, it is projected to be modest compared to the expansion in developing regions. By 2017, China is expected to have the world’s largest economy, in purchasing-power parity (PPP) terms, although its share of global GDP is expected to wane slightly after 2045. India is likely to achieve similar growth, though from a significantly lower base, with its share of global economic output projected to rise from 4.3 % in 2000 to 18 % in 2050 
Trade and investment
The increasing importance of emerging countries is also apparent in world trade, with the larger advanced economies becoming less dominant in the three decades up to 2012 and China, in particular, emerging as a major exporter. Excluding intra-EU trade, the EU accounted for 15.4 % of global merchandise imports in 2012 and 14.7 % of exports . These figures were comparable to the contributions of the US (12.5 % of imports and 8.4 % of exports) and China (9.8 % of imports and 11.1 % of exports). In general, external trade plays a large role in the economic output of the emerging economies, since agriculture and manufactured goods are more easily traded than services.
Looking ahead, global trade flows are likely to continue evolving. There are also some indications that rising wages in China are weakening its competitive advantage in some sectors. Some labour-intensive manufacturing industries have already relocated to other Asian countries and more are likely to follow . So, while China’s trade is likely to increase in absolute terms in coming decades, other countries may displace it in certain sectors.
The global economy has also become more balanced in recent decades in terms of investment flows. Foreign direct investment has expanded enormously, from 0.4 % of world GDP in the 1970s to 2.6 % in the 2000s. At the same time, advanced economies have become less dominant, with the combined contribution to global FDI of the US, EU-27, EFTA and Japan declining from almost 100 % in the early 1970s to 60 % in 2012. Motivated by a desire to secure access to resources, technologies, expertise and brands , China’s outward investment has grown enormously in recent years, accounting for 12.1 % of global FDI in 2012.
Economic risks and opportunities for developed regions
Emerging economies have competitive advantages in low-skilled, labour-intensive production. This creates a competitive challenge for advanced economies, putting downward pressure on wages for low-skilled workers in Europe and other developed countries 
At the same time, however, increasing prosperity in developing regions potentially offers a growing, wealthy customer base for exports in areas of European specialisation, such as scientific innovation and luxury brands. The global middle class — defined as households with daily available funds of USD 10–100 (PPP) per person – is projected to increase from 27 % of the world population of 6.8 billion in 2009 to 58 % of more than 8.4 billion in 2030 (GMT 2). The Asia-Pacific region is projected to provide much of this growth, accounting for 66 % of the total world middle-class population in 2030, up from 28 % in 2009 . In addition to changing consumption patterns, this is likely to bring with it evolving norms, attitudes and expectations, with potentially far-reaching implications for social cohesion and political systems 
In the long term, continued economic progress in developing regions may cause their cost advantages to disappear, ultimately leading to the repatriation (‘back-sourcing’) of some production to today’s advanced economies. Although these changes will expose advanced economies to increasing competition in areas in which they currently dominate, such as high-tech industries or financial services, the restructuring of emerging economies towards largely non-traded services as they become wealthier may alleviate some competitive pressure.
New actors and new challenges in global governance
Until relatively recently, coordination of the international economy was largely handled by the small group of structurally similar states that accounted for most global production. The financial crisis of 2008 exposed a changing reality. Today, choices by large emerging economies — for example relating to the accumulation of foreign currency reserves — can have major effects on the entire global economy.
The decline of the G7/G8 and the emergence of the G20 as the locus of global economic planning reflect this transition. Brazil, Indonesia, Mexico, South Korea and Turkey, for example, now have a more important role in global governance. China and India are already major economic powers with related global social and environmental impacts and responsibilities. Yet they have acquired this status when their average per person income levels are quite low. They therefore face a set of internal development challenges and demands that are quite different from advanced economies 
The systemic importance of large emerging economies means that their engagement in international economic governance is essential. But the growing number and diversity of participants are also likely to make it harder to coordinate global activities and ensure economic stability. The EU will remain a powerful voice in these processes but its capacity to control external risks may decline.
The need for coordinated environmental governance is also growing as economic and social interactions intensify. Globalisation of trade flows has created economic benefits for exporting and importing countries but it also means that consumers are extremely unlikely to comprehend the full social and environmental implications of their purchases. National governments have very limited capacity to monitor or manage such impacts, in part because the international agreements that facilitate global trade prevent states from differentiating between imports based on production methods 
To some extent, the harm associated with globalised supply chains may abate as growing prosperity in developing regions brings popular demand for improved local environmental and social protection. However, such advances may do little to curb pressures on the global environmental commons. At present, therefore, the international community lacks effective institutions to coordinate its response to complex globalised challenges such as climate change and international financial instability. This is creating demand for new forms of governance (GMT 11)
References  Marota-Sanchez, A. and Cuadrado-Roura, J. R. (2011), 'Analyzing the role of service sector on productivity growth across European regions', Working paper 04/2011, Instituto Universitario de Análisis Económico y Social, Madrid.  World Bank (2014), '', accessed 18 July 2014.  World Bank (2014), ' ', accessed 25 September 2014.  Krueger, A. O. (2009), 'Trade openness is now more important than ever', Special report, December 2009, World Bank.  OECD (2002), 'Foreign direct investment for development — Maximising benefits, minimising costs', Organisation for Economic Co-operation and Development, Paris.  OECD (2014), ' ', accessed 6 November 2014.  WTO (2014), ' ', accessed 25 April 2014.  Accenture (2011), 'Wage Increases in China: Should Multinationals Rethink their Manufacturing and Sourcing Strategies?', Accenture.  FT (2012), 'Vietnam offers companies China alternative', Financial Times, 12 March 2012.  Fontagné, L. and Py, L. (2010), 'Determinants of foreign direct investment by Chinese enterprises in the European Union', CEPII-CIREM.  Autor, D. H., Dorn, D. and Hanson, G. H. (2012), 'The China Syndrome: Local Labor Market Effects of Import Competition in the United States', Working Paper No 18054, National Bureau of Economic Research.  Kharas, H. (2010), 'The emerging middle class in developing countries', OECD Development Centre, Working Paper No 285, Organisation for Economic Co-operation and Development.  Pezzini, M. (2012), 'An emerging middle class', in: OECD Yearbook 2012, Organisation for Economic Co-operation and Development, Paris.  Spence, M. (2011), 'The next convergence: the future of economic growth in a multispeed world', Macmillan.  WTO (2014), ' ', accessed 4 September 2014.