The world market is shifting to the South. During the last two centuries, the northern markets have been the centre of consumption. But that is changing and the shift is being accelerated by the financial crisis. Kaplinsky and Farooki’s paper addresses two sets of issues. The first of them is about what the authors say is “a decisive shift in the dominance of production and consumption from Europe, North America and Japan to China and India in the coming decades”. The second is the effect of this change on the fortunes of poor countries in the South that will have to produce for new southern instead of northern markets.

The paper says that while consumption in the developed countries has been artificially held up by the governments running big deficits, this is not a sustainable solution and private spending will, sooner or later, have to be reduced. By contrast, consumption is rising in key southern markets such as India and China.

Illustration: Jayachandran / Mint

The chart shows how Asia’s share of spending by the global “middle class”, defined as those consumers with annual incomes of between $10 (around Rs45 today) and $100 a day in 2009 (in 2005 purchasing power parity dollars), will rise between 2009 and 2030. Of course, there are plenty of caveats to this growth story but the fact remains that, if present trends continue, the economies of China and India may well become the dominant markets by 2030.

The structure of these markets, however, will be very different from today’s main northern markets. First, China and India have low per capita incomes and that means they will consume more food as their incomes rise. Second, they will continue to require heavy investments in infrastructure and in manufacturing. The result will be a growing demand for commodities, both agricultural and industrial, and also energy.

Graphic: Ahmed Raza Khan / Mint

In China during the 1990s and 2000s, for instance, every 1% rise in GDP saw a more than 2% increase in the demand for rolled steel. Also, as incomes increase, the demand for meat rises, and increased meat production means increased demand for grain for animal feed. The authors say that this has helped explain the boom in commodity prices between 2001 and 2008.

The fact that the new consumers of the South will be poorer means that “product differentiation” (variety and quality) gives way to product “commodification” (standardization in order to achieve low prices). The authors say that standards, too, are likely to be lower. And thirdly, while the northern markets prefer much of the labour-intensive processing industries to be located in the exporting countries, that will change as importers such as India and China, too, have low labour costs and are not as sensitive to pollution costs.

That China and India are now seen as lucrative markets is very obvious. In December, for the first time, more cars were sold in China than in the US. The shift in the kind of cars sold is also evident—you only have to look at the many small car models that are planned for India.

The paper’s strength lies not just in pointing out the growing importance of the South, but also the kind of changes that this shift in consumption will entail. From India’s point of view, however, it is the rise in food and energy costs that need to be planned for without any delay.

Write to simplyeconomics@livemint.com