Just about everyone that follows politics and economics knows that businesses in the United States dominated the world economy in the 1980s and 1990s. Really, American-based businesses have been king of the business world since World War II. That dominance has loudly come to an end.
Unsurprisingly, the end of American dominance of the world’s economies is not evenly distributed, with American manufacturing the worst hit, while such industries as professional services and finance still quite dominant. The question here is – how long can the financial system of the United States continue to dominate the financial markets of the world?
Background
First, here’s some history on what’s happened globally with American economic dominance since 1980. The following is the percentage share of measured global economic output by nation.
In 1980, the businesses based in the U.S. were the unquestioned kings of the global economic landscape, accounting for over one-fourth of all measured economic output according to International Monetary Fund (IMF) data. Far behind in second place were businesses based out of Japan at about 9 percent.
From 1980 to 1990 not much changed. In fact, the share of the world’s measured economic output became a little more concentrated in the hands of the Americans and Japanese at about 35 percent compared to 34 percent in 1980.
Fast forward to 2000. From 1990 to 2000, some changes start to appear, with the emergence of China and India-based businesses starting to be globally competitive. In 2000, business in the U.S. was still far and away the biggest of “big business” countries, accounting for about 24 percent of measured global output, although business in China had grown to 7 percent of global output and India-based businesses accounted for about 4 percent of global output.
Current View
Moving to today – the following shows what the world’s economy looks like in 2014. Notice anything interesting? The rise of businesses in China and India. From 2000 to 2014 (estimated), the share of global output accounted for by businesses headquartered in China or India had doubled from 11 percent in 2000 to 22 percent in 2014.
Now, for an even more sobering look, fast forward to the IMF’s 2019 projection, presented below. By 2019, IMF economists anticipate businesses in China to surpass the United States, making economic output out of China the largest in the world, surpassing the United States for the first time since 1872.
Perhaps even more interesting, the IMF anticipates economic output in China and India to surpass output out of the U.S. and Japan by an astonishing 2.5 percent. The 2.5 percent is only 0.2 percent below the size of the Russian economy!
Future of the U.S. Financial System
With this as the backdrop, how long can the U.S. financial system continue to be the envy of the world? The answer to this question, of course, depends on many factors, including the role of the dollar in American trade, the competitiveness of U.S. stock exchanges, the role and power of the U.S. military, government regulation, confidence in American finance, and a few others.
One potential answer is – the decline has already started. Take a look at the following graphic showing the growth in employment in the financial industry by business cycle from peak to peak. The label for each line represents the year in which a peak occurred.
The figure clearly shows that the recent financial crisis is the worst on record for financial industry employment, still about 5 percent below its peak, whereas most industries are quite close to being back to their previous peak. Hopefully this graphic is not indicative of the end of American financial dominance, but one never really knows until it’s already happened.
Overall, businesses in the U.S. don’t dominate the global economic landscape anymore. How long can American finance continue to be the king of the financial world? It is, of course, anyone’s guess, although there’s reason to believe that American financiers should start thinking long and hard about their future role in the global financial system.
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