Multiple Economic Crises and the Retreat of Globalisation

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 Multiple Economic Crises and the Retreat of Globalisation


The world economy has experienced a series of crises since 2007-2008, when the collapse of Lehman Brothers triggered the Global Financial Crisis. That event marked a turning point, as we have seen a new normal of subdued growth in the world economy and world trade since then. In fact, world trade has never fully recovered from the global financial crisis. Between 2003 and 2007, world trade grew at very high rates, around 7-10% per annum, which helped developing countries, especially in East Asia, grow quickly and build their manufacturing sector through exports to the world. China was the biggest beneficiary of the expansion of global trade during that period. However, since then, world trade growth has been flat at a rate of 1-2%. This level of growth is not sufficient to provide opportunities for other developing countries, like those in South Asia, to build manufacturing-led growth. We have also seen a rise of protectionism and trade wars in the developed world in many forms, for example, the restrictions on the issuance of H1B visas by the US.

As a result the globalization that was once a key driving force of the world economy has been in retreat, or slowbalization as termed by The Economist magazine. We are no longer globalizing in the same way as before. There has also been a retreat of multilateralism, as evidenced by the stalemate in the Doha Round of WTO negotiations and the lack of progress on the liberalization and development agendas. The COVID pandemic of 2020 has also had a significant impact on the world economy, disrupting it in a way that has not been seen in the past century

The lockdowns implemented in response to the pandemic caused disruptions that resulted in economic contractions in many countries around the world. These contractions led to widespread job losses, with vulnerable groups such as micro, small and medium enterprises (MSMEs) and marginalized communities being hit the hardest. Inequalities have widened, as the poor, women, elderly, disabled, and school-age children have been disproportionately affected. This has led to an increase in poverty in many regions.

The pandemic is not yet over. In countries like China, strong and oppressive lockdowns are still in place, affecting growth rates. COVID is still raging in many parts of the world, with the Omicron variant of the virus being particularly rampant in China and some countries in Southeast Asia. These countries have relied on vaccines that have proven to be less effective than others, making it difficult to put the pandemic behind us.

The Russia-Ukraine war has also had an impact on the world economy, disrupting supplies of oil and gas and leading to rising prices for hydrocarbons, food grains and other commodities. This has resulted in global inflation and pushed central banks around the world, particularly the Federal Reserve in the United States, to aggressively tighten monetary policy, strengthening the dollar. This has created problems for developing countries that rely on imports, as the rising dollar has made these goods more expensive. As a result, developing countries have faced a complex set of challenges, including exchange rate volatility, rising prices, inflation, balance of payments challenges and pressure on central banks to raise interest rates. This has affected growth rates and contributed to the threat of a global recession, as well as the possibility of stagflation. There is also a risk of a global debt crisis, as many developing countries are grappling with staggering levels of debt that are made worse by rising interest rates.

Developing countries are facing challenges, including those related to poor ecological management in developed countries, which has contributed to extreme weather events disproportionately affecting the poor. In recent years, we have seen an increase in extreme weather events and natural disasters, such as floods, droughts, and cyclones, as well as poor air quality, all of which have had a negative impact on growth outlooks. South Asia is particularly vulnerable, with Bangladesh, India, and Nepal ranking as the three of the top four most affected countries. This region has been disproportionately affected by the worst impacts of climate change and the environmental mismanagement of industrialized countries during the period of their growth.

Another disturbing trend that has emerged in recent times is the rising inequalities between and within countries due to various factors including the digital revolution. The digital revolution is widening the gap between the countries that are ahead in this revolution and others. For example, the valuations of the top five big tech companies (Google, Microsoft, Apple, etc.) rose by $2.2 trillion in 2021 alone. This demonstrates how wealth is being concentrated in certain countries that are ahead in the technology race, leading to greater global inequality. Inequality is also increasing within countries, as a small group of technology entrepreneurs see their wealth and income grow significantly. This concentration of economic power in a few hands is a disturbing trend that is happening in countries around the world, including India, where some startup founders have become billionaires overnight. Fortunately, Nepal has managed to avoid this trend and has actually seen a decline in inequality thanks to its well-managed social protection system. The rest of the world could learn from Nepal's example.

A persistent problem that has been highlighted during the COVID pandemic is the unequal access to opportunities or basic amenities. The opportunities or amenities of life such as education, health care, access to clean water and sanitation, electricity, the internet, nutrition for children, and banking services, are necessary for individuals to reach their full potential. In South Asia, and particularly in rural and disadvantaged areas, access to these opportunities is often limited based on social and economic status, as well as gender. Nepal has done better than some other South Asian countries in terms of addressing these inequalities and providing access to empowering opportunities.

The COVID pandemic has exposed the wide gaps in access to opportunities, particularly in terms of public health infrastructure, social protection, and basic services such as sanitation, financial inclusion and the digital divide. These gaps have affected people's ability to sustain themselves and protect themselves from the pandemic. For example, children with access to digital services such as the internet were able to continue their classes online, while those without such access were left behind. These disparities in access to amenities and opportunities have had a significant impact during the COVID pandemic.

Another issue to consider is the trend of jobless growth, where economic growth has not been accompanied by an increase in employment. In the past 10-15 years, the employment elasticity of economic growth has declined, meaning that we are seeing less employment generated for each unit of economic growth. This trend is likely to continue with the arrival of the fourth industrial revolution, which includes the digital revolution and technologies such as artificial intelligence, the Internet of Things, and blockchain. These technologies reduce the share of labor costs in production, making it less necessary for companies in developed countries to outsource production to developing countries in order to save on labor costs. There may be a reversal of the trend of offshoring, with companies bringing production back to their own countries or to nearby countries. If this job crisis continues to worsen, it will have serious consequences for the economy and for young people in particular. Therefore, policymakers must take action to both educate young people in the areas where the demand for skills continues to be strong and help them find employment.

Global Economic Environment turning less benign
To sum up therefore, the global economic outlook has turned less benign and more uncertain in recent years. There is a serious risk of global recession due to factors such as inflation and monetary tightening, which may also lead to a mild recession in the US economy in 2023. In Europe, there has been a significant economic crisis related to the conflict between Ukraine and Russia, which has disrupted access to gas, oil and food grains from these countries. China is facing a severe crisis due to the prolonged lockdowns and zero COVID policy. The government is now trying to relax these measures, but the situation remains serious. With the major economies of the world, including the US, Europe, and China, facing challenges and economic pressures, India seems to be the only major economy among the top 10 largest economies that is still  experiencing robust economic growth. Although its economic growth outlook has been revised downward slightly, Indian economy is still growing at a rate of 6-7%.

A number of countries are facing a debt crisis and seeking assistance from the International Monetary Fund (IMF). Supply chain disruptions caused by COVID-19 have prompted global companies to reconfigure their global value chains through strategies such as reshoring, nearshoring, or adopting a "China-plus-one" approach in order to reduce their dependence on a single source for their supply chains. The ongoing process of reconfiguring and reengineering supply chains is likely to have negative impacts on many countries, particularly those that are highly integrated with these value chains.

Nepal, in addition to all these challenges, has also faced an additional challenge - the need for reconstruction following the devastating 2015 earthquakes. Nepal has been enlisted for graduation from the list of Least Developed Countries (LDCs) by the United Nations, which will bring some challenges, including the loss of trade preferences. While the impact on Nepal's economy may not be as significant as on some other countries like Bangladesh, it will still require some effort to manage the transition. With proper planning and resources, Nepal can effectively navigate this transition and continue to advance economically.

Opportunities for Nepal
In the context of the current retreat of globalization and the emergence of trends such as nearshoring and onshoring associated with the pandemic related supply chain disruptions and the Fourth Industrial Revolution, it is critical to focus on the internal drivers of growth. One key area to focus on is infrastructure development, as it has spillover effects that can help accelerate the rest of the economy. By prioritizing infrastructure development, Nepal can revive industries such as manufacturing and tourism, and boost overall economic growth. Investing in social infrastructure, such as quality education and healthcare, is also crucial for Nepal's development.

Another important factor to consider is harnessing the potential of the digital revolution for competitiveness. While it can be viewed as a threat or challenge, the digital revolution also presents significant opportunities for Nepal. For example, micro, small, and medium enterprises (MSMEs) can leverage e-commerce and digital marketing to reach global markets, and women entrepreneurs can use these tools to sell their products internationally. By embracing the digital revolution and using it to its advantage, it can tap into new markets and expand its reach.

Economist Robert Baldwin's book, 'The Globotics Upheavals,' discusses the futuristic trends that the Fourth Industrial Revolution, including artificial intelligence, will bring about. According to Baldwin, one key area of change will be the expansion of trade in services, as people will be able to deliver services remotely from their homes. To take advantage of these technologies and opportunities, it is essential that we invest in higher education and train our youth in fields such as artificial intelligence, coding, and machine learning. By doing so, we can position ourselves to fully exploit the benefits of the digital revolution.

Fostering industrialization based on domestic strengths is crucial for Nepal's economic development. It is a matter of concern that the share of manufacturing in Nepal's GDP has declined from 10% in the 1990s to just 5% today. We need to reverse this trend of premature deindustrialization and focus on areas where Nepal has strengths. For example, the country's extensive green cover and forests could be utilized to develop forest-based industries and supply products to countries like India which has been importing pulp all the way from Canada. The herbal medicine sector is another area of potential growth, as Nepal has a rich history and resources in this area. Nepal could position itself as the Ayurveda and Wellness Center of the World, leveraging its unique location and resources in the Himalayan region.

Another important opportunity for Nepal is harnessing the potential of clean energy sources, such as hydropower, wind power, and solar power. Nepal has already made some progress in this area, but there is enormous potential for further development. By maximizing its clean energy capabilities, Nepal has the potential to become a significant energy supplier for all of South Asia. As a producer of clean energy, Nepal can carbon credits and support the clean energy transition of itself as well as of other South Asian countries.

Nepal also needs to focus on harnessing the potential of regional cooperation. At the South and South-West Asia Office of UNESCAP, we found that 76% of Nepal's potential exports to South Asia could not be realized due to a lack of supply capacity or competitiveness. This highlights the importance of investing in supply capacity and competitiveness in order to fully exploit the potential of intraregional exports and other forms of regional economic integration. By focusing on these areas, Nepal can tap into new markets and further integrate into the regional economy.  

(Excerpts of the keynote speech, delivered by Dr. Nagesh Kumar, Director of New Delhi-based public-funded policy think tank, namely the Institute for Studies in Industrial Development (ISID), at the Asian Paints NewBiz Business Conclave & Awards held on December 12, 2022 in Kathmandu)

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