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A transformed global economic landscape

The 2007-08 global financial crisis continues to alter the worlds economic scenario, argues the writer in the first instalment of a two-part series


he investment and export-led

growth model that marked the
emergence, successively, of the
east Asian, south-east Asian and Chinese
economies, is being questioned in the
light of developments since the global
financial and economic crisis (hereafter
called the Crisis) that erupted in 2007-08
but whose consequences continue to
alter the international economic landscape. This crisis was unprecedented in
that it arose at the very epicentre of the
world market, the nerve centre of the
world financial networks and comprising the most advanced, affluent and
influential countries. These countries,
had collectively evolved the legal infrastructure, set the standards and norms
underlying international trade and
investment and dominated the global
economic architecture over the past two
centuries or more. Such entrenched systems take a long time to change but
change may be accelerated by unexpected and far-reaching crises.
The emergence of east Asian, southeast Asian and Chinese economies, took
place in a global economic landscape
dominated by the mature economies of
the trans-Atlantic zone. It is also the postWorld War II expanding markets in this
zone, joined subsequently by Japan, and
the flow of capital and technology from
the zone which made the investment and
export-led growth model a viable choice
for the emerging economies. These countries also enjoyed a high rate of domestic
savings, relatively cheap but increasingly skilled labour and local entrepreneurship supported by the state. Although
this is debatable, some analysts argue
that having relatively authoritarian
regimes in these emerging countries at
least during the initial period of high
growth would have also helped. For most

of the post World War II period, world

trade has risen at a rate twice as fast as
global gross domestic product (GDP)
growth, as barriers to trade flows have
progressively diminished. There has also
been a remarkable increase in capital
flows emanating from the developed
countries, which have promoted and
enabled export-led growth in developing countries. Typically, foreign investment has involved the setting up of local
processing or manufacturing units for
generating exports back to the home
country or other markets. The setting up
of complex regional and global supply
chains by international multinational
companies, has reinforced this trend.
Although a latecomer, India has, since
its economic reform and liberalisation
programme began in the early 1990s,
shifted its stress to investment and
exports as key drivers of growth. This
enabled the Indian economy to gravitate
to a much higher growth trajectory
almost double of the pre-reform years.
The country has been less successful in
integrating itself into value supply chains
and this has become a major constraint
on its exports. It remains a mostly domestic demand-driven economy.
So what has changed since the Crisis
and what are some of the enduring features
of the emerging global economic landscape?
The Crisis has transformed and is still
transforming the global economic architecture. Some of the earlier trends are
being reinforced, such as the shift of global economic activity from the transAtlantic to the trans-Pacific, both in terms
of proportion of global trade but also
investment flows. What has not changed
much is the continuing domination of
the global financial markets by the West,
which continues to mediate even the
flows generated by emerging countries.
Neither has there been much change in
the West determining the legal norms,
standards and regulatory frameworks,
which govern inter-state economic activity. More importantly, the West, but in
particular the United States, continues to
be the chief source and repository of innovative technologies. As growth becomes
increasingly driven by technology and
knowledge in general, the West will continue to enjoy pole position in the global
economy. These factors will change at a

slower pace unless there is a virtual collapse of Western economies but this is
unlikely. These enduring factors need to
be kept in mind as we try and fashion an
appropriate economic strategy for India.
There are several changes that are
apparent and will have significant impact
on India. According to the World Trade
Organization (WTO), trade grew by six
per cent per annum between 1990-2008
while world GDP grew by about three per
cent per annum. Since 2008, this longterm trend has been broken as global
trade has been rising at the same rate or
even slower than global GDP. The trade
slowdown is visible even in China. The
recent devaluation of the Chinese yuan
has been triggered by the fear of losing
markets in a diminishing market. Indias
exports have declined over seven consecutive months. They have remained
flat at about $300 billion a year over the
past four years. Even services exports
have remained sluggish. It is unlikely that
the target of $900 billion for goods and
services exports will be reached by 2019,
since it would require 15 per cent growth
year-on-year from now. Rising exports
are not likely to emerge as a significant
growth driver in the near future without
major policy interventions. The importance of the domestic market as a growth
driver may even increase in salience.
The story is similar with respect to
cross-border capital flows, which have yet
to pick up from the steep decline in the
post-Crisis period. While India has been a
modest recipient of foreign direct investment and international portfolio investment, we are witnessing more Indian

firms investing outside the country than

foreign firms investing in India. This, too,
goes against the east Asian model.
Chinas emergence as a top-ranking
exporter of goods in the past three decades
and more was associated with a remarkably favourable international economic
environment up until the Crisis. There
was an open and expanding market for its
goods in the major advanced markets and
a sustained flow of external capital to
enable investment-led growth. The international economic environment postCrisis is no longer as benign and India
today confronts a relatively stagnant but
much more competitive global market.
In the post World War II period, the
overall trend was towards creating an
open, transparent and rule-based multilateral trade regime. In the early years,
the differentiation between developed
and developing countries was taken as
a basic principle, with relatively greater
responsibilities and commitments
falling on the former. However, since at
least the Uruguay Round in the early
1990s, the focus began to shift towards
reciprocity as the guiding principle and
the exclusive focus on goods trade and
tariff regimes also began to give way to,
including services and some non-tariff
provisions, as part of what is now the
WTO regime. Furthermore, the basic
principle of Single Undertaking, that is,
all parts of the trade regime must be
accepted by WTO members with no partial agreements, has also been diluted.
Even among WTO members there are
plurilateral initiatives underway such as
the Trade in Services Agreement (TISA)

and the Information Technology

Agreement-2 . Indias non-participation
in these sectoral regimes requires a careful rethink. The WTO permits limited
bilateral and regional free trade arrangements despite the latter diminishing its
role as the premier multilateral forum
for universal rule setting . It is becoming
increasingly a forum for settling trade
disputes. This trend began before the
Crisis. It is being reinforced post-Crisis.
Despite its commitment to the WTO and
multilateral processes, India itself has
concluded bilateral and regional trade
agreements. It has also conceded the
inclusion of services and a few other
areas in its Comprehensive Partnership
agreements with a select group of countries. Acknowledging this trend and
evolving a coordinated strategy to deal
with it has become an urgent necessity.
The global trade regime has been moving away from a focus on tariffs and border measures to behind the border issues,
in particular, standards, regulations and
norms relating to labour, health, intellectual property rights and the environment.
Keeping some of these issues out of the
WTO has not led to their exclusion from
bilateral and regional trade agreements. It
is the tariff prism through which India
continues to frame trade related issues
and this influences its negotiating strategies. India has joined bilateral or regional
trade agreements for defensive objectives,
mainly to defend market share or to preventing trade diversion rather than as
instruments to promote trade and investment. Business in India has itself not been
an active player in shaping negotiations
on Free Trade Agreements (FTA) because
of this defensive mindset. Indian negotiators achieved success in phasing out
textile quotas in a 10-year time frame, but
the textile industry in India made no effort
to use the transition period to upgrade
the technological standards and scale of
operations to be able to compete in a highly competitive market. An opportunity
created by negotiators was lost by lack
of follow-up.
(To be concluded tomorrow)
A former foreign secretary, the writer is
chairman, Research and Information System
for Developing Countries, and senior fellow,
Centre for Policy Research