The Global Economic Environment

FICCI CEO Retreat, Dubai
My Talk
28-Oct-2017

In my remarks today, I will start with a brief macro view of the global economic environment, touch on some challenges, note the current setbacks to globalization in terms of trade policies and note the new approach to globalization that China is leading with the OBOR initiative. I will also comment on ideas for India’s continued integration into the global economy.

Global economy rebounds, supported by improved outlook for advanced economies
The global economy has shown signs of improvement, with the International Monetary Fund (IMF) projecting global growth to rise to 3.6 percent in 2017 and 3.7 percent in 2018. The rebound is supported by an improved outlook for advanced economies: growth prospects in Euro area, Japan, emerging Asia, emerging Europe, and Russia are likely to contribute to this pick up in global growth.

India, on the other hand, received a downward correction caused by the transitional effects of GST and demonetization. IMF expects a recovery in GDP growth rate next year. However, the new projections are lower at 7.4 percent as against the earlier projection of 7.7 percent.

Equity markets have fared well globally and India followed a similar trend.

The IMF predicts that the U.S. economy will grow by 2.2 percent in 2017 and 2.3 percent in 2018. It was recently reported that U.S. GDP indeed grew by 3% in the last quarter. According to the Bureau of Labor Statistics, the unemployment rate in the U.S. fell to a 16 year low, standing at 4.2 percent in September. However, inflation continued to remain below the Fed’s policy target of 2 percent. The Fed is of the view that an improving labor market will eventually push inflation higher and thus it has already begun the policy normalization process. Higher interest rates in the U.S. are said to trigger capital flow out of emerging markets. However, with increased forex reserves, these countries are in a relatively better position now, than a few years ago, to withstand the Fed’s policy normalization.

According to the IMF, Euro area growth is expected to rise to 2.1 percent in 2017 on the back of a broader pickup in global trade and continued strength in domestic demand growth sustained by supportive financial conditions.

The U.K,’s growth deceleration is likely to continue, with IMF projecting 1.7 percent in 2017, lower than 1.8 percent in 2016 and 2.2 percent in 2015. The pound’s depreciation amidst growing uncertainty over the U.K.’s economic growth adversely affected domestic consumption. U.K.’s new economic relationship with the EU and trade barriers, migration, and cross-border financial activities will determine its future growth.

Japan is likely to benefit from both the improving global economy and a strong fiscal stance. The victory for the ruling party in the recent general election raises hopes of more fiscal stimulus, which is positive for Japan’s growth. Against this backdrop, Japan is expected to register 1.5 percent growth in 2017.

China’s stimulus programs have enhanced economic growth, with growth seen reaching 6.8 percent in 2017. Excessive credit growth has fueled property market growth in China and attempts to rein in credit growth may adversely affect China’s economy.
Turning to Africa, Nigeria is expected to arise from the 2016 recession caused by low oil prices and the disruption of oil production. Projections for growth in 2017 stand at 0.8 percent, on the back of recovering oil production and continuing strength in the agricultural sector. In South Africa, IMF expects growth to remain passive at 0.7 percent in 2017 and 1.1 percent in 2018 as heightened political uncertainty hits business confidence.

Global unemployment expected to increase
Against this picture of improved growth, the International Labor Organization (ILO) expects the global unemployment rates and levels to remain high in the short term on the back of a growing global labor force. The global unemployment rate in particular is expected to rise marginally in 2017, to 5.8 per cent from 5.7 per cent in 2016.

And output growth will surpass labor force growth. Over 50 percent of the workers in Southeast Asian countries are reportedly at a risk of losing their jobs due to extreme automation in the next two decades. This shows the extent of challenges that developing nations face. The importance of reskilling cannot be ignored.

The importance of SMEs and entrepreneurs for employment creation
SMEs and entrepreneurs are the main contributors to economic growth, job creation and poverty alleviation. Policies and initiatives that assist SMEs must be encouraged. Further, new firms enhance the overall innovation climate in a country.

Promoting a supportive ecosystem needs to be a policy priority for governments looking to develop their economies. This is an area where FICCI initiatives would be valuable. For instance, promoting policy development at the state and centre and encouraging collaboration between academic institutions and industry.

The pause in globalization
Moving on to current trends in globalization, one must note the dramatic shift in pace evidenced by Brexit, the pulling down of the Trans Pacific Partnership and the renegotiation of NAFTA.

The pause in the advance of globalization will have important consequences to the economic landscape, with regard to growth, earnings and balance sheets. And with regard to job growth and inequality, but perhaps in the opposite direction of what the anti-globalization protagonists fear. The slowing of globalization will result in fewer jobs being created.

India and China have been beneficiaries of globalization. India has seen its slice of global GDP moving up from 3.6% in 1990 to an estimated 7.3% by 2016; over the approximate period that its economy was opened up, India doubled its share of global GDP. Although not to the same extent as China, it has clearly benefitted by opening up its economy. In fact, India stands at a potentially transformative threshold.

Deepening interdependence with the world economy is imperative for economic expansion. Through trade-led growth, Korea and Japan became among the world’s most competitive economies. Another example is of China moving from autarky to a globalized developing country, growing almost 10 percent annually for three decades. Mexico rose from repeated financial crises with further trade liberalization in the past two decades. On the other hand, Brazil and Russia, and have seen sluggish progress, having resisted international interdependence.

India’s trade initiatives to date, however, have featured modest ambition, limited economic impact, slow implementation, and partner countries that themselves are averse to substantial liberalization. India’s free trade agreements (FTAs) have been widely criticized for their inability to address significant pockets of protection in India itself and thus in its partner countries.

The Indian economy is now growing at about 7 percent and is aiming for double digit growth. However, one key element missing from India’s strategy is a concerted effort to achieve the trade expansion needed to meet the country’s ambitious double-digit growth and attendant job creation targets. India must sharply increase its exports of both manufactured goods and services to achieve this. Reports suggest that export gains to the tune of more than $500 billion per year could be realized by participating in comprehensive Free Trade Agreements. One can already see the benefits of some of the new FTAs, for instance the increase in automobile exports to Latin America.

Several sectors of the Indian economy will benefit from such trade expansion. There will be an improvement in productivity and competitiveness. The opening of both export and import markets will allow greater Indian participation in global value chains.

Larger export markets will bring new economies of scale to textile and many other manufacturing firms. Small and medium enterprises (SMEs) in particular stand to gain from becoming integrated into global value chains.

India could pursue a bilateral agreement with large countries like the U.S. adding several elements of mutual interest such as higher education, trade in medical services, energy and science and technology.

New approaches to globalization: OBOR and AIIB
While we have seen the U.S. and U.K. turn the dial back on globalization, China has been moving forward with another approach. It is well known that good infrastructure is as critical to trade as good policy, and China has laid out its grand vision of One Belt One Road (OBOR), also known as the Bridge & Road Initiative (BRI).
OBOR covers around 60 countries accounting for 65% of the world population, around 50% of the world GDP and a 29% share in global trade. OBOR envisions six economic corridors spanning across the continents of Asia, Europe and Africa, thus enabling China strengthen its influence in these regions and to indeed create a polar position for itself in the evolving global economy.

Alongside this vision, China set up two new financial institutions in 2014, the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund (SRF) to provide financing for infrastructure investment in Asia. AIIB provides China an opportunity to establish itself as an economic power in Asia.

AIIB and OBOR are well thought out initiatives for China. AIIB supports Beijing’s policy to finance overseas investment projects. OBOR provides an international stage for Chinese companies to globalize themselves. It will help the country export its surplus volumes in key sectors such as solar energy, cement, steel and construction to generate revenue and further strengthen the overseas market share of the state-owned enterprises (SOEs).

Particularly, AIIB complements China’s OBOR by its focus on finance for infrastructure. This, in turn, will help Beijing (AIIB’s headquarters) develop as a new center of the global economic order.

India is the second largest shareholder in AIIB. India refrained from attending the OBOR conference recently, which even the U.S. attended. India’s Act East policy and increased interest in Africa need to be translated into concrete plans and actions to create physical connectivity from India through Bangladesh and Myanmar to Thailand and to Southeast Asia. The recent ideas of collaborating with Japan in this space could help accelerate such activity.

In conclusion, the global economic outlook appears modestly positive for the next two or three years while one major economy the U.S., has turned protectionist, and another, China, is decidedly expansionist. Economic growth globally is not being accompanied by employment growth. India has a vested interest in increased globalization in order to increase its exports, get its SMEs integrated into global supply chains and generate much needed employment.