Threat of global protectionism

With global economic recovery ambling in a wobbly way, a backlash against globalisation and a potential retreat into a protectionist fortress by country after country are looming large, casting a pall of gloom over the prospects of “acche din” for all. The June 23 Brexit verdict, stemming largely from the entrenched fear of immigrants making inroads and taking jobs of natives, though misplaced, is a decisive riposte that globalisation has not brought gains but only pains!

This is also summed up by Theresa May when she availed her maiden speech as the newly-elected Prime Minister of the United Kingdom (UK) post-Brexit, to pledge not to govern for “the interests of the privileged few”. 

The International Monetary Fund could barely cloak its discomfiture when in the aftermath of the Brexit, it had to cut global growth prospects by 0.1 percent. This meant, for the $73 trillion global economy, Britain’s tetchy voters have cost $150 billion, analysts wryly say. IMF cryptically put it that “the Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies”. 

It is small wonder Central bank governors and finance heads from the G-20 group of some of the world’s biggest economies huddled together with the notable exception of India’s Finance Minister Arun Jaitley and the outgoing RBI Governor Dr. Raghuram G Rajan in China’s southwestern city of Chengdu last weekend (July 23-24) to discuss how to tackle global challenges aggravated by Britain’s last month monumental decision to leave the EU. 

At the end of the two-day deliberations, they pledged to try to boost global economic growth and confront uncertainty about protectionism in the wake of the UK’s referendum vote to leave the EU. Growing dread of protectionism, exemplified by Brexit and some of the parochial trade proposals born out of paranoia by the US Republican Presidential candidate Donald Trump were also discussed at the G 20 meeting. 

It is unfortunate that New Delhi, smarting under the Middle Kingdom’s patent bid to block its entry into the Nuclear Suppliers Club (NSG), did not send any high-level delegation to the high-table meet at Chengdu, though the ostensible reason trotted out was the Finance Minister’s presence is needed in the ongoing monsoon session of Parliament when crucial bills like the GST needs to be passed. But the fact remains that India should have wisely made good use of the opportunity to let its views and voice heard in this indispensable forum where finance ministers of the world’s powerful nations get together in a sort of powwow to deliberate on issues of immediate and long-term interests to the global economy.  

A key theme at the G-20 gatherings this past weekend in Chengdu, as also a major focus of the G-20 under the Chinese Presidency is that world’s largest economies need more structural reform. 

According to IMF David Lipton, given that most emerging economies are in weaker economic fettle and have limited fiscal space, the Fund is focusing on structural reforms that could deliver payoffs in the short term. These include better management of public investment processes in India, product market reforms in China and labour market reforms in South Africa. IMF recommendations also encompass trade and FDI impediments—for instance in Brazil, India, and Indonesia—as well as governance of public institutions and other institutional reforms, he said in a blog.  

Barely the G-20 finance ministers’ conclave got over than the world trade monitoring body, the World Trade Organisation (WTO) in its July 25 Director-General’s Mid-Year Report on trade-related developments exhorted its members to preclude putting up barriers and “get trade moving again” in order to address slow global economic growth. The report, which was discussed at the WTO’s Trade Policy Review Body (TPRB) reveals that 22 new trade restrictive measures were initiated by WTO members per month during the mid-October 2015 to mid-May 2016 review period. 

This shows “a worrying rise in the rate of new trade-restrictive measures put in place each month—hitting the highest monthly average since 2011”. What is particularly worrisome is that of the 2,835 trade-restrictive measures, including trade remedies recorded, for WTO members since 2008, only 708 or 25 percent had been removed by mid-May 2016. The report rightly lamented that in the current milieu, a spurt in trade restrictions is the last thing the global economy needs. It observes that “this increase could have a further chilling effect on trade flows, with knock-on effects for economic growth and job creation”. 

A note prepared by the IMF on global prospects and policy challenges, especially for the G-20 finance heads at Chengdu, zeroed in on a menu of options pointing particularly to the overarching need for “a broad-based policy effort to contain risk and reinvigorate growth both in the short and the longer term.” These include, among others, reducing uncertainty around “Brexit” and its repercussions, implementing effective macroeconomic support, addressing debt overhangs, lifting long-term growth and rendering it more inclusive and reinforcing multilateral action. The latter two measures are nowhere urgent than in the present context when countries have a proclivity to turn inward and thereby directly contribute to perpetuating the infirmity in the global economic recovery. 

The IMF note is upbeat about India, stating that its economy is on a recovery path, helped by lower oil prices, positive policy actions and improved confidence. This is no doubt an endorsement of the Modi sarkar’s economic management, despite the non-cooperation of the scattered Opposition from within and without but more could be accomplished, if there is a bipartisan attitude for rescuing the economy before it slips into any protracted spell of recession and jobless growth.

While stating that India’s economic growth is projected at 7.4 percent in both the current fiscal and in 2017-18, the Fund also highlighted what it dubbed “headwinds from weaknesses in India’s corporate and bank balance sheets, a decelerating pace of reforms and sluggish exports”. 

These adverse factors would all weigh on growth, the IMF appositely cautions, adding that “the quality of fiscal consolidation in India should be improved through comprehensive tax reforms (such as the goods and services tax) and improving tax administration and measures to further reduce subsidies”.  Although the Fund has been suggesting these sets of measures far too long, action on the ground appears impaired by political realities and lack of cooperation from Opposition. It is time India became a responsible member of the G-20 by benefiting from its uninterrupted interaction with its fellow members and following its indigenously-crafted economic measures that do not run conflict with its global ambition, policy wonks say. IPA