Retreat from globalisation risky

In its Annual Report, released on Sunday, BIS economists recounted in a special chapter how globalisation has goaded and boosted economic welfare the world over, besides being instrumental in raising living standards and eliminating poverty. It said, while trade openness has vastly enhanced productive efficiency and improved consumption opportunities, financial openness has allowed greater latitude for diversifying risks and earning higher returns, besides bolstering global trade. Financial liberalization has made funding more readily available and enabled the transfer of knowledge across countries.

The BIS has also highlighted posed challenges. Gains from trade have not been evenly distributed at the national level with domestic policies not always being successful in addressing the concerns of all. The requisite structural adjustment has taken longer and been less complete than expected, also adding that unless properly managed, financial globalisation can contribute to the risk of financial instability, akin to domestic financial liberalisation. And not least through financial instability, it can augment inequality.

Stating that attempts to roll back globalization would be the wrong response to the challenges, it said globalisation, like technological innovation, has been an integral part of economic advancement. As such, it should be properly governed and managed. Countries can implement domestic policies that enhance adaptability such as retraining programmes. Close cross- country linkages imply that policies and actions of individual countries inevitably affect other. Rightly the BIS economists plump for international cooperation to supplement domestic policies, in particular, calling for a global regulatory framework to be the basis for "a sound and resilient international financial system'.

Elaborating the historic process of globalisation, BIS said in the first globalisation layer, the links between trade and financial openness were most immediate. Here trade is mostly driven by resource endowments and is directly underpinned by a range of global financial services. Trade is settled with international payments, which almost always entail foreign exchange transactions. Noting that trade payments are generally denominated in a global currency rather than that of either the exporter or the importer, it said around half of all international trade is invoiced in US dollars and close to a quarter in euros.

In the second globalisation layer, international financial linkages bolster a greater degree of specialisation in trade and production, notably in the trade of intermediate goods. Production can occur through ownership of foreign facilities established by foreign direct investment (FDI), outsourcing to foreign firms or fragmented production in a global value chain (GVC). This more complex trade can go hand in hand with the growth of multinational corporations (MNCs) that serve multiple markets often through production focused foreign affiliates, while focusing research and development in the parent company. These intricate production patterns entail more complex, financing. GVC-related investments might call for cross-border financing, often in foreign currency.

The third globalization layer is characterized by intricate financial links established solely for financial purposes which build upon the first two to the extent that trade has generated stocks of assets and liabilities that need to be managed financially. Interestingly, the demand for and supply of more sophisticated financial products and services increases with the wealth of businesses and households. In a sense, trade also supports this third layer of globalization through its contribution to higher income growth. The three layers partake of some common elements. One is the use of global currencies. The dominant global currency, the US dollar is used to denominate not only around half of trade but also roughly half of global cross-border bank claims and more than 60 per cent of central banks' foreign exchange assets but also features in 90 per cent of foreign exchange transactions! For all protectionist hype and trade reprisal threats the US is making uncharacteristically, President Trump cannot set aside this important fact of his nation's currency in global financial transactions.

Pointing out that the nature of trade has altered markedly during the second globalization wave, the report said while natural resource endowments were an important determinant of trade flows five decades ago, the location of skilled and unskilled labour and relative expertise has become crucial, with the second globalization layer becoming dominant. In the early 1960s, food accounted for nearly one quarter of traded goods; today its share is less than 10 per cent. But, trade in services, including financial has surged over the past three decades from 7 per cent of global GDP to 13 per cent. And by far the biggest change has been the growth in the trade of manufactured goods which now constitute over half of global trade.

For India which has missed the secondary sector bus badly and is lately trying to make it up by Make in India and other sundry programmes to rev up domestic manufacturing and value- added, the time to act and get a share of this cake is seldom urgent than as it is now. With high and low skill tasks increasingly being located in different nations across the universe, India should gear up to get a slice of this burgeoning outsourcing business, even as it had to make do with shrill calls of protectionism and the denial of visas to skilled personnel in rich nations.

In sum, the BIS report is timely in asking the global players to demonstrate the spirit of solidarity in the enhanced virtues of globalisation. It is also a wake-up call for emerging economies like India to get focused on manufactured exports before long to reap the gains of shared opportunities abounding in the world. The BIS General Manager James Karuna wisely warned against protectionism as it "hurts growth and welfare through various channels: weaker productivity, less international division of labour and rising production costs as foreign inputs become more expensive". Does the global economy seeing green shoots of growth afford this malaise of protectionism at this juncture?