Is this the new era of isolationism? Are strong economies rethinking globalisation? The world is changing in significant ways. What does this imply for businesses and the availability of land, labour and capital?
The world is in a state of flux, with old certainties being redefined even as we speak. The financial and economic crisis of 2008 and the subsequent prolonged slowdown in the advanced economies have spurred the rise of economic nationalism and populist politics. This is reflected as much in the stunning decision of the UK to leave the EU, as in the unexpected victory of Donald Trump.
If the 1990s and the first seven years of the 21st century marked the high tide of globalisation, we are now witnessing its ebb. America has turned inward, abandoning the TPP, seeking a renegotiation of NAFTA and preferring to deal with trade issues bilaterally. American unipolarity since the end of the Cold War has given way to a multi-polar world, with a greater dispersal of economic power, especially towards Asia. The rise of China has been unprecedented, with its GDP now more than that of the US in PPP terms, though it’s way behind in terms of per capita income.
The ongoing shifts in global power have also led to competition among the great powers. US-Russia tension over Ukraine has spilled over to other theatres, including Syria. China’s new assertiveness and unilateralism in Asia is a major concern. But with slowing economic growth in China, nationalism has increasingly become the anchor of its political legitimacy. The US seeks to balance China in Asia through a more robust military presence in the Asia-Pacific, stepped-up alliances and working with strategic partners. China, for its part, is pushing the Belt and Road Initiative, using the lure of infrastructure and development assistance to enhance its influence. US-European pressure on Russia has brought Russia and China closer, leading to new energy and infrastructure linkages between them and greater global diplomatic synergies.
Despite these sharpening differences, the great powers have also cooperated on selected challenges: for example, the nuclear deal with Iran, which involved the US, Russia, China and the EU negotiating in concert to deliver as a team. US-China trade and economic linkages are extensive, as is their diplomatic engagement. Indeed, the US considers China as its most important global interlocutor and has sought channels of dialogue between their defence establishments to enhance confidence and reduce the risk of inadvertent conflict.
The global economy looks in better shape today, as the IMF has projected that global growth is likely to be 3.5 per cent in 2017 and 3.8 per cent next year. Notable is the performance of Europe, Japan, China and emerging and developing Asia, where the IMF has raised its forecast. US growth should remain above its longer-run potential growth rate, though the IMF has reduced the growth forecast to 2.1 per cent for 2017 and 2018. Projections for the UK have also been lowered due to tepid economic performance and continuing uncertainty about the impact of Brexit.
World trade growth of 1.9 per cent in 2016 was the weakest since 2010 due to economic uncertainty of Europe, low commodity prices and the slowdown in the US. But trade is expected to strengthen, with the WTO projecting a growth of 2.4 per cent in 2017; still, the WTO has struck a note of caution, given the inherent risk of policy uncertainty and other unforeseen developments. It has, thus, suggested a growth band of 1.8-3.6 per cent for 2017. For 2018, the forecast is 2.1-4 per cent.
Global FDI flows fell 13 per cent in 2016 and have yet to recover to the levels prior to the 2008 recession. Inflows to developed economies fell by 9 per cent in 2016 to $872 billion, reflecting weak European economic activity. Slowing economic growth and falling commodity prices weighed not only on trade but FDI as well, particularly flows to developing countries. But FDI remains by far the biggest source of funding for development, accounting for 60 per cent of resources and far higher than remittances and official development assistance. Developing Asia remains the largest FDI host, receiving $541 billion in 2016.
Given the ever closer links between trade and investment, the WTO suggests that focus on investment facilitation may help in scaling up mutual understanding and confidence in policy circles. Longer-term growth forecasts, however, remain subdued, despite the improvement in the current outlook. Subdued longer-term growth trends bring risks as we have seen, with the fraying of the consensus on globalisation in some advanced economies. While unemployment is falling, median real incomes have been stagnant in advanced economies in recent decades. Wage growth remains weak and inequality has been growing, exacerbating social tensions and creating more inward-looking economic policies in advanced economies. On the other hand, emerging economies have seen substantial increase in incomes even at the lower levels, although inequality has persisted and grown.
The next generation of technological changes, such as AI, automation and 3D printing, will also have a disruptive effect. Indeed, the majority of job losses in the advanced economies have been mainly due to technological advancements rather than globalisation. Stronger safety nets, and prioritising education, training and reskilling would be essential to ease the adjustment of those left behind.
What does this international scenario imply for India? India’s economic growth has been in a sweet spot in recent years. But now, India will have to accelerate growth in a less supportive environment. We need access to capital, technology and markets. We need to be nimble and pragmatic to leverage our relations with the great powers and developing countries to optimise our economic space. The rise of China has been an opportunity and a challenge for India; we need to shape an Asian balance to check Chinese unilateralism, while seeking mutual benefit in economic ties, including growing Chinese investments in India.
Technologically, India can leapfrog and that represents a major business opportunity. Opportunities for digitisation of financial tasks and commerce are set to increase exponentially in the coming years. Renewable energy and electrical vehicles will be the wave of the future, given the commitments for a less carbon-intensive growth under the Paris Accords. Mastery in design, development, manufacture and deployment of such technologies through the Indian economy could provide the growth accelerator that we seek.
Globalisation, though constrained, is here to stay, and rolling it back will be complex and disruptive. This means that Indian companies have to be competitive, setting their standards as per global benchmarks. Of course, we have the advantages of a huge domestic market, which has yet to reach its full potential, a young population, which will be in the working-age group, a vibrant culture of entrepreneurship and a vigorous democratic tradition. Businesses and the government should think how to harness these forces and propel the growth process.
We must invest in our human resources because we too are vulnerable to the risks of low-wage growth: over the last two decades, wages have been more or less stagnant in India. Despite overall growth, inequality has been on the rise. Growth needs to be inclusive by creating more labour-intensive jobs; for this, we need to relax our rigid labour laws.
India has the ability and opportunity to strengthen its economy and emerge as a middle-income country to lift its people out of poverty and contribute to global peace and prosperity. But for this to happen, conversations need to start among all stakeholders to create an enabling environment for growth, where the future of each Indian is secured.
About the author:
Meera Shankar is India's former Ambassador to the US & Germany. Following an illustrious career in the Indian Foreign Services, spanning 38 years, Ms Shankar now serves as a Non-Executive Independent Director of ITC Ltd, Pidilite Industries Ltd, Adani Transmission Ltd and Hexaware Technologies Ltd. She holds the distinction of being the second female ambassador to the US after Vijaya Lakshmi Pandit.