Globalisation, recession, and India turn 75 Years?

Like it or not, we live in a globalized world. How you define or measure globalization can differ, but it means greater financial integration among countries, as well as more political cooperation, immigration, and trade of goods and services. In all these domains, globalization has been on the rise until recently.

15th August 2022 will be a very special day for India as it will be celebrating its 75 years of Independence. India is best positioned among emerging nations to weather a global recession and take advantage of neo-globalization, as a booming domestic market makes it less dependent on exports, according to multi-Billion-dollar fund manager. In India, favourable demographics and low regulatory risk are driving local consumer demand.

A return of foreign funds could boost Indian stocks and Foreign Direct Investments (FDI), which have been resilient this year even as their Emerging Market peers suffered the worst first-half performance in 24 years amid concerns on US interest-rate hikes and China’s pandemic lockdowns.

Has Globalisation peaked?

Some economists, pundits and politicians are arguing that globalization has peaked and will now start to reverse. Niall Ferguson sees this period of globalization, thanks to the pandemic, fading away with a whimper. Harvard economist Dani Rodrick is announcing the end of neoliberalism. But globalization isn’t a phase; it’s a force that can’t be stopped.

The end of the Cold War, improving technology that facilitated trade (especially of services and information) and an intellectual environment, favoured all things global. Countries dropped tariffs and more capital and goods moved across borders than ever before.

The last few years caused us to question the value of globalization. It delivered on many of its promises; more than a billion people no longer live in poverty. Goods and services are much cheaper, and diversification has made the economy less risky. But there were also problems. Bringing billions of lower-paid workers into the global market very quickly displaced many people in richer countries from their jobs and worsened inequality within countries. Dollarization meant some developing countries faced currency volatility as foreign investors pulled their money out at the first sign of trouble. 

No surprise, then, that there has been a backlash against globalization accompanied by policies to slow or even reverse it. The pandemic, which led to shortages when trade slowed, only added to the disenchantment with globally integrated supply chains. Both political parties are pushing for industrial policies that subsidize more domestic manufacturing of certain goods. There are more tariffs on some goods and restrictions on capital. The IMF, once globalization’s biggest champion, now endorses capital controls.

More broadly, globalization was always a choice, and many nations are no longer embracing it. A good number of policymakers, including those across the political spectrum in the United States, are turning away from free markets, looking to actively shape their economies through a mix of industrial policies including tariffs, export controls, and all sorts of subsidies for sectors deemed strategic.

The outlook appears even more dire. China’s once unstoppable economy — a big force in globalization’s rise — is not looking so good. The world may not be able to count on China for cheap and plentiful goods anymore. Meanwhile, a rising dollar and interest rates will put pressure on emerging markets, which will make them even more skeptical of global markets.

Manufacturing depends on intermediate goods made all over the world that are not only cheaper but made with skills we don’t have anymore. America’s recent attempt to re-shore semiconductor manufacturing illustrates why industrial policy is much harder than it looks and is not a good solution to structural job loss.

The benefits from globalization are too good to walk away from. Many people no longer live in poverty and the world has become accustomed to cheaper stuff. We are seeing how disruptive and painful the return of inflation has been both economically and politically. Deglobalization would make inflation much worse, and no one wants that. It turns out politicians are quite flexible on their policy views (see phasing out fossil fuels) if it can deliver cheaper prices. Big talk on a retreat from globalization may be the next populist position to fall.

Opportunity for Indian Exports:

Going forward, countries need more diversification when it comes to where they get their goods and commodities, not less. We may not be able to depend on China with its aging population and uncertain economic future, but more production may come from younger countries such as India who still can benefit from more economic integration.

As companies and suppliers look for new commercial options, India has advantages that could and should be a big draw. In addition, Latin America, with its proximity to the United States is enjoying a Goldilocks middle for those nervous about spread-out international production: Not too close but not too far.

Globalization is far from perfect, but on balance it does make our lives better. New tariffs and industrial policies will take us a few steps back toward protectionism, but more trade can relieve pricing pressure and maintain the momentum toward more integration. The tone of discourse about globalization may have changed, but the genie is out of the bottle and won’t be contained.