7 PM Editorial |New Economic Realities and Need of Decentralization|6th August 2020

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New Economic Realities and Need of Decentralization

Introduction:

Since 1991, liberalization, globalization and free trade have been guiding principles of economic policies of nations. But as the world faces the economic consequences of COVID 19, these principles may not aid in tackling new challenges. This is because of changed ground realities in terms of factors of production like technology, barriers to trade and demand structure changes.

Changed ground realities:

Increasing diversification of supply chains: COVID pandemic has exposed limitations of dependence of supply chains on a single country. In such a scenario, nations are looking to diversify supply chains and will be averse to dependence on one country. This limits the export oriented growth model which benefited China and other east asian countries. India being a later mover, may have to pursue other strategies of growth. Specific sectors where there is competitiveness of Indian industry must be identified to promote exports.

Increasing protectionism: As countries look inward to tackle economic fallout of COVID pandemic, protectionism is on the rise. Limiting movement of people, import substitution, locating supply chains inside countries will be focused on. US limiting H1B visas, green cards is an example. In such a scenario, an export oriented growth model will have limitations.

Technology displacing labour: Earlier argument of, market reforms boosting investment which will create jobs, is no more completely valid. Technologies have been displacing low to mid tier jobs, which is accelerated by COVID pandemic. While this increases productivity in the long run, it will reduce job opportunities.

4D’s – Depopulation, Declining productivity, High debt and Deglobalization are the new trends predicted by economists.This is in contrast conditions in early 21st century where globalization was seen as unstoppable phenomena.

  • Depopulation will result in reduced demand as is evident in developed countries which are ageing. As developing countries reduce fertility rates, demand will fall in these countries too.

Demand structures are changing:

  • Climate change based consumption patterns will increase practice of 3R’s – Reduce, Reuse and Recycle. This is will reduce demand for new goods
  • Rent based consumption replacing ownership: Shared mobility, rental homes are examples. This reduces demand for new goods.

Reduced investments by companies: As demand reduces, companies will reduce expansions. This in turn will reduce credit in the economy. Hence banks will have to depend on equity and small firms for growth.

Geopolitical rivalry between China and USA: As the world enters a new cold war between USA and China, involved nations will have to divert their resources towards defense and security expenditure. Hence sectorally, this is a growth avenue. Other avenues are healthcare and education. But rising tensions will introduce risk factors to global economic growth and trade as was seen in trade war.

Conclusion:

In such a complex world with fast changing dynamics, top down governance will not yield desired results. Earlier models of growth are no more relevant. Solutions must be bottom up and decentralization must be pursued. This will enable new models of growth and induce resilience locally.

Source: https://www.livemint.com

Mains question:
  1. Principles of liberalization, globalization and free trade are no more relevant in today’s new economic realities. Critically discuss? [15 marks, 250 words]
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