BrazilA changing World Order to drive economic and digital decoupling?
The global economic landscape is undergoing significant transformations, influenced by various factors including geopolitics, technological advancements, and evolving investment strategies. Paul Lalovich and Tesha Teshanovich, leaders at Agile Dynamics, explore one of the major shifts currently unfolding: economic and digital decoupling.
As nations seek to reduce interdependence and enhance economic resilience, decoupling is one of the most notable trends of the past years – and likely the coming years as well.
Decoupling can come in all kinds of forms and shapes. Typically, it involves dismantling existing trade and investment relationships, severing supply chains, and establishing new economic partnerships elsewhere. Decoupling can also take place in the digital realm, including in areas such as foreign transactions and digital assets.
The strategic response of tech companies
The immense and rapid investments in global decoupling have technology companies rushing to adjust their short- and long-term strategies. Despite decoupling seeming almost certain, various bottlenecks ensure that the global tech industry remains interdependent.
Understanding that decoupling will take years to unfold, with tech executives beginning to conduct scenario-planning exercises for the next decade and beyond. They prepare for various outcomes, mitigate risks, and seize opportunities. These exercises will become more common as rival nations strive to match capabilities and expand their domestic tech sectors.
Companies will need to develop new capabilities, including the ability to recruit talent from a network of allied countries.
Changing the World Order?
As described in Ray Dalio’s book ‘Principles for Dealing with the Changing World Order’, significant transformations occur in the global economic landscape. Historically, European nations led the world economy, especially during the Industrial Revolution and their colonial empires. In the 20th century, the United States became the leading economic power, characterized by substantial economic growth and technological innovation.
In recent decades, China’s rapid economic rise has shifted the global balance. China's GDP per capita and technological advancements have grown significantly, making it a key player in global trade and finance. Despite a recent decline in China's foreign direct investment in the United States, its domestic economic policies and strategic global investments highlight its ambitions to reshape the global economic landscape.
While China’s exports to developed markets have plateaued, they have doubled in the Global South, with growth observed in every region, including Asia, Latin America, Africa, the Middle East/North Africa, and Central Asia. This diversification reflects a broader trend of economic integration and development across emerging markets, driven by robust trade relationships and investments that are redefining global economic dynamics.
The relative decline in the economic dominance of established powers is not due to a weakening of their economies but rather the rapid rise of China and other emerging markets. This shift is evident in the evolving economic strategies and increasing internal challenges these established powers face.
The rise of digital assets
Capital allocation towards digital and real-world assets in emerging markets is experiencing a significant increase. This trend is driven by the growth and integration of digital asset markets, which have expanded to include institutional investors alongside traditional retail and high-net-worth individuals.
Advancements in blockchain technology have provided the necessary infrastructure for secure and efficient digital transactions. The tokenization of assets allows for fractional ownership of traditionally illiquid assets like real estate, private equity, and fine art, democratizing access to these investments and enhancing liquidity.
There is growing interest in tokenizing real-world assets (RWAs), with market projections suggesting it could reach between $5 trillion and $16 trillion by 2030, up from approximately $300 billion currently. RWAs encompass a variety of asset classes, such as real estate and commodities, which can now be traded on decentralized networks, reducing costs and improving efficiency.
Blockchain technology is transforming capital markets in emerging economies by lowering barriers to entry, facilitating business incorporation and management, and enabling more flexible securities systems. This promotes financial inclusion and provides new opportunities for entrepreneurs and investors. Countries with progressive regulatory frameworks and digital-friendly policies are attracting more investments in digital assets and tokenization, fostering innovation and economic growth.
Further reading: Unlocking FDI potential in growth markets with RWA tokenization.
The implications of global capital market conditions
The current global capital market conditions suggest a significant amount of unallocated capital may flow into digital assets soon due to several factors. Firstly, higher interest rates have created increased volatility and uncertainty in the global capital markets. This has led to a cautious approach among investors waiting to see how economies and markets adjust to these higher rates before committing to new investments.
Despite this cautious approach, a substantial amount of unallocated capital, known as ‘dry powder’ is sitting in global funds. For instance, nearly $850 billion is currently held in closed-ended funds targeting real estate, ready to be deployed when market conditions become favorable.
Investors are increasingly looking to diversify away from traditional assets like equities and real estate, which have underperformed or are perceived as high-risk due to market conditions. This trend is pushing capital towards alternative investments, including digital assets, which are seen as offering better risk-adjusted returns.
There is growing optimism about the risk-return prospects of digital assets as they become more integrated into the mainstream financial system. This is driven by the maturation of regulatory frameworks and the increasing institutional adoption of digital asset investment vehicles, such as spot Bitcoin ETFs. Institutional investors are beginning to allocate more capital to digital assets, driven by the potential for higher returns and diversification benefits.
The emergence of alternative financial systems
The BRICS alternative payment system holds significant potential, driven by the growing need for economic independence and resilience against financial disruptions and sanctions. According to reporting by Nasdaq, the BRICS countries are concentrating on building a robust financial infrastructure that includes regional payment systems designed to bypass the US dollar.
This initiative aims to reduce reliance on traditional Western financial networks and enhance economic sovereignty. The system is not merely about creating a payment system but involves a comprehensive strategy encompassing the use of local currencies in trade, the establishment of a BRICS rating agency to unify credit rating standards, and the creation of “bridges” between stock exchanges and depositories to facilitate direct market access for investors.
Additionally, there are plans for a common commodity futures exchange to establish regional benchmarks and liberalization of capital market access within BRICS nations.
To diversify away from the dollar, many central banks are increasingly investing in gold. Currently, gold constitutes 4.9% of China’s reserves, the highest level since at least 2015, according to Bloomberg. This trend is mirrored by other central banks, which have been purchasing bullion at unprecedented rates.
However, the strength of the dollar is not the sole driver behind these actions. Many countries are reducing their dollar reserves as part of a broader strategy to diversify global finance and challenge the dominance of the dollar.
The importance of technological sovereignty
Technological sovereignty underscores the importance of secure access to technology and essential components through both domestic capabilities and external networks. For developing growth markets, it is crucial that modern nation-states and supranational unions maintain dependable access to critical technologies, either through their own capabilities or partnerships with other economic regions.
This reliability in external relations can be ensured through various methods, including strong commitments to a shared legal and institutional framework, alignment of political interests and values, and structural interdependence.
Decentralized technologies, such as blockchain, have significant potential to enhance technological sovereignty. Blockchain technology facilitates secure, transparent, and decentralized systems, enabling individuals and communities to manage their data and transactions independently. This technology can be utilized across various sectors, including supply chain management, digital identity, and decentralized finance, thereby empowering users and reducing reliance on centralized authorities.
Tokenization of real-world assets, part of FDI-as-a-service, converts tangible and intangible assets into digital tokens on a blockchain. These assets include real estate, agricultural products, mining commodities, financial assets like equities and bonds, and intellectual properties such as digital art.
Conclusion
The evolving global economic landscape is characterized by significant shifts towards decoupling, digital and real-world asset tokenization, and the emergence of alternative financial systems. Technology companies are strategically responding to these changes, preparing for a future where economic interdependence is reduced, but not entirely eliminated.
Ray Dalio’s insights on the changing world order highlight the rise of emerging markets, particularly China, and the relative decline of established economic powers.
As capital markets adjust to higher interest rates and increased volatility, there is a growing interest in alternative investments, including digital assets. The BRICS alternative payment system and increased central bank investments in gold reflect a broader trend towards economic independence and resilience.
Finally, technological sovereignty, supported by blockchain technology, plays a crucial role in this new economic order, enabling secure and decentralized access to critical technologies and enhancing financial inclusion in emerging markets.
