Export-oriented Asian economies will benefit from strong Chinese growth
Speaking about the global growth prospects in 2021, Dr. Devasmita Jena, Assistant Professor, Madras School of Economics states that the Chinese economy rebounded from the pandemic earlier than most other markets, thanks to early containment of the virus, and stronger export growth. Consequently, export-oriented economies Asia, particularly the ASEAN nations that are poised to become China’s major trading partners, may benefit from strong Chinese growth.
IBT: After a difficult 2020 which left the world reeling from the impact of the pandemic, how do you see global growth trending in 2021? What will be the key drivers of growth?
Dr. Devasmita Jena: Recovery in global growth has already begun, albeit moderately. In its January 2021 Global Economic Prospects, the World Bank projects global GDP to expand by 4.3% in 2021, predicated on effective vaccination limiting community spread of COVID-19 in many countries. Continued accommodative monetary policy and stimulus packages may be required to boost consumer and business confidence.
Policymakers across the globe need to support sustained growth recovery by targeting vulnerable sections and sectors of the economy hit hard by the pandemic to help boost demand. This, in turn, may further accelerate global investments and growth in 2021. The key drivers of growth will be sustained consumer demand, investment demand and revival of trade.
IBT: What impact can the emergence of the new strain of COVID-19 virus have on global GDP? What other factors could meddle with the global growth prospects?
Dr. Devasmita Jena: If the vaccines don’t work against the new strains of the virus, this could pose a bigger hurdle to global recovery. Already, the new strain has led to a rise in infections in several advanced economies, which have been forced to extend lockdowns. Some services such as travel and hospitality which have been devastated by the pandemic already will find it difficult to recover if the new virus strain proves to be uncontrollable.
Other factors that can meddle with the global growth prospects are disruptions to trade as a result of protectionist sentiments, piling up of public debt, stressed banking and corporate sector balance sheets which can drag down investments, and policy uncertainty. Moreover, disruptions in the education system in many parts of the world during the pandemic could also weigh on long-term growth aspects, given the close links between human capital formation and growth.
IBT: Global trade is expected to have dropped by 7% in 2020, according to UNCTAD. How can economies across the world collaborate in the aftermath of COVID to revive trade growth prospects?
Dr. Devasmita Jena: India needs transparent trade negotiations between countries to reduce tariff and non-tariff barriers that impede cross-border trade and disrupt the proper functioning of global supply chains. It also needs multilateral cooperation to resolve trade tensions between countries, and to reform the rules-based multilateral trading system to account for trade in services and technology. The capacity of developing countries to participate in and benefit from global trade needs to be considered so that gains from trade are fairly distributed across countries.
IBT: The US has blocked the appointment of judges to the WTO appellate committee. Do you see the US approach change markedly under Biden towards WTO, US-China trade war and trade negotiations with other countries including India? Why or why not?
Dr. Devasmita Jena: The US approach towards the WTO, under the Biden administration, will depend, to some extent, on its China policy. It is believed that the US, under the Biden administration, may continue Trump’s China policy, but with a difference. The Biden administration has already hinted that it will work with allies to target unfair trade practices by China. It is possible that forums such as WTO will see greater US-EU collaboration to push common interests, including on China-related factors. But this could also mean greater pushback from them on the agenda developing countries want to push at WTO. The Biden administration may also facilitate the appointment of judges to the WTO appellate committee. However, one may have to wait to see how the Biden administration will help in reforming and reviving WTO.
As far as trade negotiations are concerned, Biden has stated that the US will not enter into any new trade agreement till the US has made significant domestic investments. Even though the Biden administration appears keen to have stronger India-US ties, it is too early to predict whether this will translate into a trade deal or reverse the GSP termination setback.
IBT: What is your opinion on the Chinese economy’s estimated growth by 7.9% in 2021 – factors driving it and challenges? Which are the other markets that are expected to show promise in growth terms and why?
Dr. Devasmita Jena: The Chinese economy rebounded from the pandemic earlier than most other markets, thanks to the early containment of the virus, and stronger export growth. In the current fiscal year, China remains one of the few bright spots in the global economy. Export-oriented economies Asia, particularly the ASEAN nations that are poised to become China’s major trading partner, may benefit from strong Chinese growth. In this regard, the significant growth in bilateral trade between China and Vietnam trade is worth noting. As per the latest data, China’s imports from Vietnam surged in recent times which augur well for the economic growth of Vietnam.
IBT: COVID-19 has highlighted the importance of sustainable economic growth. Do you expect substantial progress on this front, or do you see the world returning to a ‘growth at all costs’ approach? Please elaborate.
Dr. Devasmita Jena: Ramifications of COVID-19 have underscored the importance of sustainable economic growth that is inclusive, as well as that, strikes a fine balance between environment and economy. COVID-19 has impacted the informal sector the hardest. A targeted policy such as extending credit, providing social safety nets and subsistence income could go a long way to alleviate the vulnerabilities in the informal sector.
Also, investing in health and education will ensure economic resilience in the long run. As the economy is going to be increasingly technology-driven, therefore, it is pertinent that policy perspectives should be such that assist rapid adaptation to technological changes. Finally, addressing climate change, investing in cleaner technology, and encouraging the usage of renewable energy will support long-term growth.
IBT: What should be the fiscal stance of governments going forward considering high levels of public debt, chances of ballooning NPAs being juxtaposed with the need to fast track growth?
Dr. Devasmita Jena: The policy challenge is to strike a balance between the risks of high public debt and supporting faster economic growth. In this scenario, it will be important to protect health imperatives, prioritize investment in education, infrastructure and technology that will go a long way to ensure growth. Also, the government should announce a fiscal glide path and enhance the transparency of budget numbers to retain the confidence of investors. In addition to this, structural reforms to boost productivity will aid growth. Such structural reforms include reforms in the banking sector which can free state-owned banks from government control, and bring down bad loans sustainably over the long term.
Dr. Devasmita Jena is an Assistant Professor at Madras School of Economics. She completed her Ph.D. in 2019 from Centre of International Trade and Development, Jawaharlal Nehru University, New Delhi. She has also worked with the Reserve Bank of India, Ministry of Finance, University of Delhi and National Council of Applied Economic Research. Her research interests include International Trade and Development, Applied Macroeconomics & Applied Econometrics.