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India should tap EU, East Asia to overcome 'late convergence stall'
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SME Times News Bureau | 13 Feb, 2018
The usual brouhaha around the Budget strips the Economic Survey of the
attention it deserves. The Survey document, especially since Arvind
Subramanian has taken over as the Chief Economic Advisor, has
consistently pushed the envelope on economic thinking, providing
exciting new insights for the Indian economy. The latest one, released
three days before the Budget, introduced a new phrase into economic
jargon: The "late convergence stall". It is a phenomenon that the Survey
fears might affect the growth process of the developing world.
The
basic argument is this. Economic convergence, which is the process of
low-income countries catching up with richer ones in standards of
living, has been taking place over the last few decades at an
accelerated pace; something which economists like to call "convergence
with a vengeance". To be precise, countries were on a divergence path
before 1997, a period of convergence from 1998 till the financial crisis
in 2008 and an era of accelerated convergence post-crisis.
However,
with changing global economic scenarios, it might be more and more
difficult for developing countries to narrow the gap. In other words,
the economies that have been rapidly climbing up the economic ladder
might face a "late convergence stall".
The threat of a
convergence stall might result from the development of four challenges
that were non-existent during the formative stages of the developed
world. The first and the most crucial one is the end of rapid
globalisation that benefitted the East Asian economies and even China.
High levels of export growth rates of these countries have been drivers
of their economic growth stories.
Developing nations that are
late to the global scene cannot expect to achieve such export levels in
the current inward-looking shifts in trade policy, especially across the
developed world.
Subramanian always remains careful in stating
that it is the era of "hyper-globalisation" (or rapid globalisation)
which has come to an end, and not globalisation per se. However,
globalisation, if defined as a period when trade among nations is
growing faster than the global GDP growth, can be seen to be growing
rapidly from 1950 till a few years after the economic crisis of 2008.
During this period, growth in trade was close to five per cent while
growth in world GDP was close to four per cent. After 2010,
growth in world trade levels has fallen below GDP growth, marking an era
of de-globalisation (3.5 per cent economic growth against global trade
growth of 2 per cent). Therefore, even though the Survey takes a
conservative approach in claiming that globalisation has come to an end,
the data shows that the world is, in fact, de-globalising.
It
can be the case such low levels of trade might not hold once the world
economic growth is running in full throttle, but the fact of the matter
remains that the developing world cannot reap the same gains that were
received in the later part of the 20th century. This could bring about
the historical divergence that world economies had experienced
throughout much of modern economic history. This trend was famously
evidenced by Harvard's Lant Pritchett in his paper "Divergence, Big
Time" in which he showed that between 1870 and 1990, the richest and
poorest countries have shown considerable divergence between their per
capita incomes. Therefore, the convergence has only been a recent
phenomenon. It would not be a surprise if it returned.
To make
matters worse, other avenues of economic development that had been open
earlier are also closing down. While industrial expansion was the most
effective means of achieving economic successes for poor economies in
the past, high productivity has implied that economies in current times
reach the pinnacle of industrial employment much earlier on their growth
path.
Turkish economist Dani Rodrik, also from Harvard, calls
this "premature deindustrialisation" and shows how most of the
developing world is affected by it. Therefore, resources which earlier
used to shift from the low-productivity informal sector to
high-productivity jobs, now usually shift to sectors that are only
marginally more productive. The economic gains from a shift of labour
across sectors are thus not derived to an extent that was true for the
countries that are now high up on the income spectrum.
The case
for a slowing down of convergence or divergence is, therefore, quite
strong. The developing world needs to be prepared for any such
restoration of the past economic trend. The advent of automation and
similar technological innovations will further accentuate the problem
because the richer countries will be more capable of deploying them for
production on a mass scale. It is comforting to realise that the Indian
government is well aware of the threat in advance, but it remains to be
seen if this awareness is followed up with appropriate policy action.
The
Economic Survey gets it right in recommending rapid improvements in
human capital to sustain growth at current levels, but takes a defeatist
approach in suggesting that India can do very little about diminishing
globalisation. On the contrary, there remains immense scope for the
country to play an enabling role in further integration of the global
economic order. If the US is currently a lost cause, there remain other
large markets like the EU and East Asia where India can further the
cause of higher trade openness.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
|
66.20
|
64.50 |
UK Pound
|
87.50
|
84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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