If, after watching news of the recently concluded G20 Summit, you got the impression that the global economy is chugging along fine and that countries were getting along fine, you can attribute it to one person: the world leader with the world-leading tweet!
After firing off a set of confrontational tweets in customary style, Trump lands in wet Osaka but manages, rather extraordinarily, not to dampen anyone’s spirits. Instead, from all accounts he was on his best behavior, even managing to joke with Putin about the Russian meddling in US elections in 2016.
Getting serious business done, without Trump getting in the way, was always going to be difficult. As expected, the ongoing US-China trade tensions hogged the G20 agenda and the media spotlight. There’s no denying that trade relations between the world’s two economic powers has implications for the rest of the world as well, but there are several other urgent and pressing matters too that require world leaders to deliberate upon. Besides, there’s no greater time than now, since the start of the financial crisis over 10 years ago, that G20 nations need to come together to solve the big problems. Sadly though, that cooperation seen 10 years ago is fraying and I am not the only one to think so.
Shinzo Abe of Japan had recently written, outlining his agenda for the Osaka summit. He outlined three main areas of focus: restarting the RCEP trade talks in the region, an ambitious and visionary plan for the free flow of data in a digital world (DFFT) and immediate action steps on climate change. While the first and the third might have got some attention since other leaders too were pushing for them, the plan for free flow of data seems to have been neglected.
I was disappointed that my country, India, was among the handful of countries to reject the plan saying that they would accept such a system only if it was under WTO. While the idea that DFFT or any similar plan must work under a rules-based multilateral system is a good and honourable one, there has to be discussion and engagement on the subject first. India and other countries can’t run away from the discussion table and reject ideas merely because a system for administering them hasn’t been developed yet; it is up to them to take the initiative and help devise just such a system, along with other countries.
Such intransigence doesn’t get us anywhere, as a nation. The Indian economy has slowed down considerably and we need to find ways to boost domestic growth as well as trade with other countries. We need to be playing a much bigger role in helping shape a new economic global order that is emerging, with or without us. If we don’t step up to the plate now and accept our responsibilities, we will be left behind. The world is going to be increasingly governed by technology, and data flow will be as essential as breathing in order for businesses and governments to survive and thrive.
At the same time, we cannot let technological innovations get ahead of themselves with little or no regulation or checks and balances in place, as is happening right now. This is not just Globalisation 4.0 driven by the fourth Industrial Revolution, as the World Economic Forum has dubbed it, it is Globalization 3.0, led by technology. If the first phase of globalization was led by modern, high finance and free capital flows across the world, and the second was the manufacturing-led supply chain revolution, the third phase is the internet-enabled digital world.
According to McKinsey Global Institute, the internet economy’s share is 3.4% of the GDP of select countries that contribute 70% of world GDP (these include the G8 countries as well as India, China and Brazil as well as Sweden and South Korea as the last two have the highest broadband speeds in the world). They also believe that the internet accounted for 21% of GDP growth in advanced economies in the five years leading up to 2011. If you look at the digital intensity of the OECD economies, both by intensity of ICT services and also the investment intensity in software, there is no denying that some countries, especially the Scandinavian and other northern European economies are ahead in adopting widespread usage of digital technologies across sectors.
Like I said earlier, tech giants are getting ahead of themselves with their innovations with little thought of how they can adversely impact people’s lives and there is little or no regulation to keep them in check. It is not just a question of data protection and privacy, although that would be a good place to start; there are rising concerns of digital technologies reducing market competition, with companies enjoying huge mark-ups, and it is also becoming increasingly apparent in the US GDP numbers that the share of income gains due to intellectual property is rising. All these developments are signs that the digital economy is all-pervading and needs a regulatory framework that is global in reach and comprehensive (including cross-border trade) in impact.
The IMF and the OECD believe that countries need to start measuring the impact of digital economies on their GDP growth and welfare systems. According to the IMF, the share of ICT and ICT-enabled services in emerging and developing economies’ credit, for example, is showing greater convergence over the past 20 years. While for many countries, it has fallen from around 90% in 1995 to around 50% in 2015, in countries like India and China, this figure has grown from around 10% to 30% during the same period, with the share in India rising faster than in China in the latter decade.
While the world is being convulsed with technological disruption, there is also rising populism and authoritarianism in many countries, especially in the industrialised West. What was equally worrying for me was to read about Putin’s interview to The Financial Times just ahead of the G20 meet, declaring that liberalism and liberal democracies are “obsolete”, as if that is inevitable and we should all just accept the status quo. Of course, we know that under his leadership Russia has been trying to undermine western liberal democracies and is also moving closer to China in trade. The two countries have a US $ 400 billion energy pact spanning three decades. Meanwhile, the Trump administration has been using the dollar as a weapon to wage his wars, whether they be trade-related, geopolitical or concerning immigration. The worst example was Trump’s recent announcement of raised tariffs on Mexico if they failed to prevent Southern American immigrants from crossing Mexico’s border. Economic sanctions are another way the US uses the dollar as a weapon against countries singled out as rogue regimes, putting the brakes on several countries’ trade all at once.
If all this is not enough, of course, we have the long-standing and fractious problem of US-China trade relations to contend with. In typical nonchalant fashion, Trump declared after his talks with Xi Jinping that they would call a truce for now and that the US would hold back increasing the tariffs on an additional US $ 300 billion worth of imports from China. The small detail that got drowned in the media excitement and relief euphoria in the stock markets the next day is that China has agreed to continue to buy US farm products, so critical to his political fortunes in the 2020 elections. That is really the main reason Trump is holding off on escalating the trade war with China: Trump first, then America and last, the world. You can be sure that even this decision is not final; depending on what the polls tell him about his political standing back home, he will decide his course of action.
More specifically on the US-China trade issue, the increased tariffs are going to hurt American consumers and producers, as I had written in a post months ago. Contrary to what Trump says about China paying “billions and billions of dollars to the US in tariffs now”, it is American companies and consumers who will be paying for it, as increased costs get passed on to consumers and as farmers are compensated. More importantly, companies are not relocating their manufacturing back to the US as Trump had promised, but moving them elsewhere in the South-East Asian region. But as is apparent from media reports, many companies had started shifting their manufacturing base out of China before the trade tensions began, which have only helped to aggravate the uncertainty and hasten the process.
What is indisputable is that American companies, like most multinationals, earn a significant portion of their revenue from outside the US and China is the biggest contributor – China’s share of revenue ranges from 20% for the likes of Apple and Nike to over 70%, for some tech companies such as Qualcomm and Broadcom. According to an S&P Foreign Sales Report, foreign sales for S&P 500 Companies rose to 43.6% in 2017 from 43.2% the previous year, with the highest of 47.8% reached in 2014. The share from Asia was the highest at 8.26%, with half of it (4.3%) coming from China, while share from Europe was 8.14% in 2017. America has to accept that these companies are there, for the size and potential of the Chinese market now and in the future, not merely for an export base. It is this aspect that India too must exploit as the world’s second-largest market for many goods and services – albeit with lower purchasing power – with huge growth potential in future.
Well, the Indian government seems to have other ideas. The Indian Economic Survey – which is really an advisory document – appears to present a neo-liberal view that the growth target of 8% and US $5 trillion GDP can be achieved by boosting private sector investment, primarily through exports. It is wishful silver bullet advice and it also talks of relying more on Richard Thaler’s “Nudge” economics. All of it appears wrong-headed to me and doesn’t even begin to address the real issues facing this country. It seems to completely overlook the problems plaguing bank credit and more importantly, ignores the need for structural reforms in the agrarian sector. The Union Budget for 2019 too reflects the government’s belief that agriculture growth or alleviating farmer distress is not necessary to achieving GDP growth. Government borrowing will also increase, due to a shortfall in tax revenues, thanks to the lower corporate tax rate of 25% being extended to most companies. The plan is also to borrow from overseas, since that might be cheaper than borrowing locally. What no one seems to want to address is the precipitous fall in the household savings rate (16.2% last year), which accounts for around 70% of domestic savings in India on which the banking sector relies for lending purposes. None of this sounds good or is confidence-inspiring to me, though. Meanwhile, stock markets plummeted on the news of minimum public shareholding being raised to 35% from 25% in listed entities, while bond yields dropped appreciably probably cheering the overseas borrowing and the large bank recapitalization programme.
Coming back to the G20 summit in Osaka, I suppose we must be thankful for small mercies that it wasn’t as controversial as many recent summits have been. And while issues like climate change did not receive adequate attention, we have to take the mention of the Paris Climate Accord in the final communique as a positive sign for the way forward. I personally believe that the world – including the environment champions of Europe – need to shift to a carbon tax system as opposed to carbon-trading, as is being practiced now in several countries. It is a pity that China, as one of the world’s biggest emitters, has chosen to go the carbon trading way when it has proven to be rather ineffective for decades in Europe. In fact, there are reports that three countries – China, India and Japan – are leading in subsidizing coal-fired power plants, when we should be subsidizing renewables and natural gas-fired ones.
Free trade needs to be boosted through more multilateral agreements, and that calls for greater cooperation between countries and regions. While the US accuses some countries like China and India of misusing the WTO system, the answer is not to jettison the WTO altogether, but to work towards reforming it. If defining countries as “poor and developing” and “advanced” has become outdated and problematic in today’s trade negotiations, perhaps the time has come to reform the WTO system to accept more finely nuanced categories of countries and rules that should apply to them. After all, we have had “emerging economies” for around two decades and now there is even discussion of “frontier economies” as many more small nations join the global trading system.
What the world needs – more than ever – is statesmanship. Committed leadership that will point the way forward in solving intractable issues, create consensus and make the world a better place. For the fact is that in today’s interconnected and globalized world, what is good for humanity is often good for each country’s citizens; hurting another country with tariffs in effect ends up hurting your own people. I am glad that the TPP is progressing with the remaining 11 countries, that RCEP will continue to make headway too, and that the Paris Climate Agreement has so many willing supporters. In particular, I hope the G20 stays mindful of points 5 and 8 in the final communiqué issued in Osaka; 5, in which the group reaffirms “our commitment to use all policy tools to achieve strong, sustainable, balanced and inclusive growth and safeguard against downside risks” and 8, about being open to trade and investment.
The world is changing fast before our very eyes, and those countries who take the initiative with the right policies will always be better off. I am thinking in particular of certain Scandinavian and Northern European countries that have been exemplary in making the right decisions for decades, and the results are there for all to see. Those who want to join such global and regional coalitions for change must drive them and those who choose to opt out must, sadly, accept isolation.
Peripatetic Perch 