ANALYSIS:The toll of the subprime crisis on the West is set ultimately to empower China and India, writes Paul Tansey.

THE BALANCE of global economic power has been shifting for some time from the advanced to the emerging economies. The current financial crisis is weighing most heavily on growth in the advanced economies. The World Economic Outlook, published yesterday by the International Monetary Fund (IMF), charts the continuing evolution of a two-speed global economy.

The volume of world trade, while not matching the exceptional expansion of the recent past, is still set to grow by 5.6 per cent this year and 5.8 per cent in 2009. The quantum of world output, which increased by 4.9 per cent in 2007, is forecast to increase by 3.7 per cent this year and 3.8 per cent in 2009. These trends are hardly indicative of a global recession.

However, the advanced industrial - mainly western - economies are faring poorly. The IMF has revised downwards its growth rates substantially since its last assessment in January. A full percentage point has been lopped off the forecast for US growth in 2008, cutting it from 1.5 per cent to 0.5 per cent. Moreover, the advanced economies are heavily interdependent in the economic and financial spheres. Europe has not managed to decouple itself from the problems besetting the US economy. The IMF has cut its forecast for euro area growth next year from 1.9 per cent to 1.2 per cent.

The advanced economies have been battered and bruised by a series of shocks and surprises. The financial chaos unleashed by the US subprime lending crisis and the subsequent credit crunch to date has largely been confined to the economies of the advanced countries. Many of the advanced economies have seen their once-prized residential property booms turn to busts. All are suffering the effects of steep increases in commodity prices, particularly for energy and food. All are experiencing competitive pressures from low-cost imports produced in emerging economies.

While advanced economies are faltering, the emerging economies are powering ahead. Thus far, they have been largely unaffected by the subprime crisis and its aftermath. Currently, they are the wellspring of world growth.

It is not a little ironic that the two strongest players on the global economic stage at present are China and India - one a communist country, the other a nation with a history of protectionism.

China, with a population of 1.3 billion, or one-third of the global total, continues to exhibit extraordinary rates of economic growth. After it expanded by 11.4 per cent in 2007, the IMF predicts real gross domestic product (GDP) growth rates in China of 9.3 per cent in 2008 and 9.5 per cent in 2009.

India, with 1.1 billion, also continues to grow at an exceptional pace, with real annual GDP growth expected to average 8 per cent in each of the next two years.

Since the current international financial crisis will cause much less dislocation in the emerging than in the advanced economies, its long-run impact will be to hasten the transfer of global economic power from the advanced to developing countries.