Author : Nilanjan Ghosh

Originally Published 2020-04-15 11:07:55 Published on Apr 15, 2020
A changing global economic order will make many nations focus on India as a preferred destination for investment over China.
How a changing global order will emerge in the post-Covid world

The debate on an emerging new global economic order had been floating since China announced its Belt and Road Initiative (BRI) seven years ago. With BRI being a global development strategy involving infrastructure development and investments in nearly 70 countries to exploit cheap factor markets and expanding product markets, it was thought to be rocking the status quo of the occident ruling the roost.

The idea of the status quo in the global political and economic order was challenged further with the emergence of strong leaders, the dominance of nationalistic fervour emerging from a xenophobic discernment of some major nations, and the insulating tendencies of economies that were once the major proponents of free-market economies and globalisation. Such tendencies can be witnessed in the US’ withdrawal from the TPP, the prolonged US-China trade war, Trumpian disregard of the Climate Change crisis and Brexit. On the other hand, China’s BRI began obtaining momentum with nations from the EU, Asia and Latin America joining in. This marked the ride of China on its BRI horse, which was attempted to be combated by some coalitions like the “Quad” in the Indo-Pacific — a potential security arrangement among the four large democracies, Australia, India, Japan, and the US.

A game-changer

Then came Covid19, with the initial cases witnessed in Wuhan, a manufacturing hub in China. In the globalised world, more than 210 nations were affected in varying degrees. The most interesting observation is that the economies with the highest levels of exposure to China either through BRI or otherwise are the ones most affected by the virus. In ongoing research with two colleagues, I have argued that the openness of an economy with respect to China delineated by three variables, namely, tourism, trade and investment, can largely explain the spread of the virus.

New status quo

This can be evinced with the case of Italy, one of the highest Covid-affected nations. China was not only Italy’s largest cooperative trade partner but ever since the nation became a BRI member in 2019 it emerged as one of the major destinations of Chinese FDI. Iran’s exposure to China was in the form of the latter being its biggest trading partner with massive Chinese investments and labour flown to Iran. Similarly, high export exposure of South Korea to China often occurs through assembly lines before being re-exported to other nations. While the infection is caused by the physical proximity of citizens of affected countries, at a more macro-scale there is substantial evidence about the role of trade, investment, and human capital movement in transmitting the virus. It is obvious that economies will take counteractive measures by closing borders.

This is bound to bring about a major change on plans for regional connectivity. With economies insulated as an immediate response to the crisis, globalisation goals will be severely affected. Trade routes will be seen with suspicion, and investment in foreign destinations to exploit the global value chains (GVCs) in usual destinations will be cast with doubts. Will India win or lose under these changing dynamics? Will the world choose a safer destination like India to exploit GVCs? Though short-run impacts will be negative, there is no doubt that over time growth drivers will change organically. This organic movement will be pronounced in the service sector, with a large part moving to the digital world, creating virtual workspaces. The ambitions of physical connectivity will be replaced by digital connectivity. Hence, there remains the possibility that growth may be spurred from this digital space mostly from services, but this will also witness simultaneous slump and closures of traditional manufacturing. However, the biggest challenge for India will be to place the major component of the services sector that remains unorganised, informal, and has limited reach in the digital space.

From a global perspective, China cannot be a trusted partner anymore. Rather, the India-factor in the QUAD in the Indo-Pacific in the post-Covid world becomes significant and a prime force to combat the China-factor. It needs to be noted that it isn’t only with the movement of goods and investment that gates may be closed, but a more severe impact may be witnessed on labour movements. With stricter immigration rules prevailing all across the world, a nation like India that has boasted of providing “skilled human capital” to the developed world may be a loser.

Advantage for India

However, a changing global economic order will make many focus on India as a preferred destination for investment. From that perspective, India’s eastern states will be critical. They have all four factors of business in abundance: namely, human capital, social capital, natural capital and an improving physical capital. This part is relatively less explored and can be the fulcrum of development of the region in the post-Covid world. While the global economic system is slated to go to a slump, opportunities and challenges for India occur through all avenues. Whether India will be a net winner or loser depends on the sensitivities of the coefficients of the economic variables, the dynamics of the global order, and the “soft power” that the nation can wield in the international domain.

This commentary originally appeared in Mail Today.

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Nilanjan Ghosh

Nilanjan Ghosh

Dr Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF) in India, where he leads the Centre for New Economic Diplomacy (CNED) and ...

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