International power broker Henry Kissinger -- who also happens to be Tim Geithner's first employer out of college -- said in a 2007 interview with Charlie Rose that "we're at a moment when the international system is in a period of change like we haven't seen for several hundred years."
And what's changing? Former President of the World Bank James Wolfensohn is more specific:
You will have a 22 times growth [in developing countries like Brazil, Russia, India, China, and Mexico] between now and the year 2050. And the current rich countries will grow maybe two-and-a half times. This is not just ... a modest statistical change. This is a change in terms of quantum and in terms of importance.
A new world order is emerging. What will be changing?
The current world order
The Group of Seven (G-7) -- a meeting of finance ministers from the United States, Japan, Germany, Italy, the United Kingdom, Canada, and France -- has been at the center of power in international affairs for more than three decades. The Brookings Institute calls their semi-annual meetings ''the preeminent forum of the global governance system for the world economy.''
From 1965 to 2002, G-7 countries were responsible for approximately two-thirds of global economic output. Their majority economic might, along with the military supremacy of the NATO alliance, allows the G-7 to dominate international institutions such as the International Monetary Fund, World Bank, Bank of International Settlements, Financial Stability Forum, and others.
These institutions craft policies that set the standards and practices for international finance -- in effect, the rules of the game. These are rules that any country, company, or bank must follow if they want to do business with the biggest game in town.
But alas ...
The G-7 is quickly losing its grip on power and its ability to effectively govern the world financial system. Soon, it will no longer the biggest game in town.
Emerging-market economies have now caught up with G-7 nations, and they are growing at such a rapid rate that by 2050, Wolfensohn estimates the current G-7 countries will account for only 25% of all world output. With this in mind, the G7 invited the finance ministers of developing economies to a summit in 1999.
This forum became known as the G-20. All the usual emerging-market suspects were present, including China, India, Brazil, Mexico, Saudi Arabia, and Indonesia. The first-ever G-20 heads of state summit was held last November in Washington, D.C., with the goal of formulating a new international financial regulatory regime in order to stabilize the financial system. Indian Prime Minister Manmohan Singh called the summit "a clear indication that the balance of power is shifting in favor of the emerging economies."
The G-20 meets again in London on April 2, and negotiations are currently under way discussing issues such as corporate governance, regulatory standards, capital ratio requirements -- in short, the rules of the new world order. With such massive geopolitical power shift under way, it's easy to understand part of the reason why volatility is at record levels all over the world. Many investors are not sure how this period of change will shake out.
The only thing we have to fear...
But savvy American investors do not need to fear this global power shift, nor the dawn of the Chinese century. Many U.S. companies will benefit by expanding their international market share, and U.S. investors will profit by directly owning stocks in foreign companies. By positioning your portfolio, you can profit alongside them.
For example, the technology to tackle some of China's pressing environmental problems will come from American companies like General Electric
And while American companies with an expanding international presence can be attractive investments, the companies headquartered in emerging economies offer an even bigger potential for way bigger growth. Widely followed stocks such as Chinese Internet search engine Baidu.com
And the upside potential is even bigger for international stocks that aren't widely followed. At Motley Fool Global Gains, we are always finding new, under the radar international companies poised to grow. Our team travels the world to talk with some of the most innovate entrepreneurs, business leaders, and managers operating in emerging markets. You can see our top international picks for new money with a 30-day free trial.
Fool contributor Matt Hoffman hopes to visit India, Brazil, Russia, and China, in that order. He owns no shares of any of the companies mentioned. Baidu is a Rule Breakers selection. Johnson & Johnson and Petrobras are Income Investor picks. Microsoft is an Inside Value recommendation. Apple is a Stock Advisor pick. The Motley Fool is investors writing for investors.
