The US-Israel war on Iran has been, in some ways, the last nail in the coffin of the post-World War II global order. It has exposed the limits of US power, changed expectations regarding global energy markets, and emphasised to all countries that the old rules pertaining to international economic and security matters are no longer to be relied upon.
Of course, the parallel deterioration in US institutions is also a concern, since this decline reduces the chance that the US will reverse course in its global role. China has continued to benefit from the decline in the quality of US political leadership, both in absolute terms and in comparison to the US. Meanwhile, it continues its rapid economic advance.
Like Japan, South Korea, and Taiwan before it, China’s growth was enabled by the US-led global order, but, barring a complete breakdown in the system, it no longer needs the US in that kind of leadership role to thrive.
Actions like the closing of USAID and withdrawal from the World Health Organization are further signals of US retreat from moral leadership. In this world, the Canadian prime minister’s invocation of the idea of “middle powers” — a class of nations that can collectively pursue stability and progress — is useful.
As the world becomes more uncertain, diversification of political and economic ties is more valuable. Individual choices can be pointers to, and precursors of, national decisions. As the US becomes less hospitable to foreign students, Indians seeking higher education are looking more to countries like Germany, while India’s Chief Economic Advisor uses Germany’s clusters of focused, export-oriented mid-sized firms (the Mittelstand) as an aspirational model for India.
Attracting more German investment to India could round out these connections.
Diversification of ties with other countries makes sense in a world of greater uncertainty. But it is a defensive strategy. A strategy for mitigating risks also has to pay attention to rewards. Countries like Germany, Japan, and South Korea are rich potential sources of knowhow in a range of technologies.
While we think of countries like these as manufacturing powerhouses, manufacturing does not succeed in isolation. Successful manufacturers develop expertise in supply chain management, including logistics, and in marketing to and serving customers.
The list of countries that can be sources of the expertise that India needs has grown dramatically over the past few decades, even as China has dominated the headlines. One can also note that the drivers of demand are easy to see, and they will determine which markets grow.
These drivers are climate change, ageing populations, increased availability and analysis of information, and rising discretionary incomes that will be spent on leisure activities, including those which involve creative expression and play.
Several of the drivers of the world economy increase the demand for capital. The destruction caused by recent wars will also need capital for rebuilding. In recent decades, the global cost of capital has been unusually low, providing an opportunity to ramp up productive investment.
Some of that happened in India at the turn of the century, but not enough, and some of the additional investment in India was unproductive, due to weak financial intermediation. Unfortunately, capital is going to be costlier going forward, and this will be an additional challenge for India’s future growth.
The domestic savings rate has fallen from its peak, and while the “quality” of investment, as emphasised in a recent Economic Survey, is important, India will need more domestic saving as the competition for global capital increases. The country’s institutions for financial intermediation need serious policy attention.
This includes legal and judicial institutions that affect commercial contracting, as well as tax policies and how they are applied.
In the abstract, how to deal with a world of increased turbulence and even disorder is simple: diversify globally, identify opportunities for growth, and boost savings and investment. The devil is always in the details. And it is tempting for policymakers to try to micromanage those details. Such micromanagement rarely works, if ever.
But policymakers can make strategic choices, and put rules in place to facilitate private sector decisions that flow in the direction of those choices. Doing so requires policymakers to balance independence from and cooperation with private sector decision-makers — a balance that Peter Evans, after studying the cases of Brazil, India, and South Korea, labelled “embedded autonomy”.
The US has had its own version of embedded autonomy as it has grown, but the past few years have seen a rapid descent into crony capitalism. That kind of descent is always a danger. Checks on that possibility come from political competition and competition for investment funds.
For India, better financial intermediation and political decentralisation down to the level of the states can strengthen these kinds of competition. Openness to trade and investment also support competition. India — at the national and state levels — has so many places it can improve its economic policy framework and detailed policy design that, along with strategic adjustments at the national level, it can thrive amidst turbulence.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.