COVID-19 is a chance for more strategic globalisation

Rashmi Banga, Senior Economic Officer, UNCTAD, feels that instead of a recourse to rapid globalisation post-pandemic, the world should look at a balanced approach to address the inherent weaknesses of the previous wave of globalisation – growing inequality, rising levels of debt, declining share of labour in income and increasing concentration of corporate rents.

IBT: UNCTAD’s Trade & Investment Report 2020 states that the world must not re-globalise at a rapid pace post-COVID. What approach is UNCTAD recommending instead?

Rashmi Banga: There are a lot of calls to quickly reglobalise with more trade liberalization. But there are some flaws in this argument. For instance, advanced countries are pushing for removal of tariffs on pharmaceutical and medical-related products at the WTO. But when you look at the list of the products, it goes much beyond the WHO mandated list of medical and related products.

We have argued in the report in favour of strategic trade liberalization, because we have to see which sectors need protection, which sectors need to be given a push and what kind of additional support can be given to the export-oriented sectors.

Removing all barriers to trade and investment is not the way forward to recovery. We did that earlier, and it led to a lot of inherent weaknesses in the global economy. And that is the reason why the damage inflicted by COVID-19 was so huge. The global economy was already experiencing growing inequality, rising levels of debt, declining share of labour in total income and increasing concentration of corporate rents.

Now that we have been given a second chance by COVID-19, we should try to put in place policies, which will help us to recover better and overcome the inherent weaknesses that arose as a result of the previous wave of hyper globalisation.

IBT: Data over the past few months shows a possibly quicker trade recovery than expected. How is this panning out across markets and what factors will determine which economies come back faster than the others?

Rashmi Banga: I think it is very difficult to predict this in the short term, because you don’t know how the pandemic is going to spread, whether the infections will come back, and whether more lockdowns will be needed. So, there might be spurts of trade growth in some countries. But in many developed countries, more lockdowns are being announced. It means that exports of developing countries, which are picking up pace in these markets, may get adversely affected again. We should therefore look at the medium to long term scenario. Many countries are experiencing a 2nd wave of the pandemic

IBT: But the wealthier nations might be better placed to support their economies for a longer period?

Rashmi Banga: I think it is very important to give proper support to export-oriented sectors. Developed countries with deep pockets can do that and therefore will be able to recover their exports faster. But developing countries or LDCs, especially those exporting primary products and relying on tourism, with limited resources will be more adversely affected and will take longer to recover. Their SMEs need additional support at this juncture,.

If you look at the fiscal measures and bail outs, in developed countries these amount to, on an average, around 30% of their GDP, while in developing countries these are at 5% of their GDP. So, not only are the developing countries going to be hit harder than the developed countries, they will also take more time to recover.

IBT: In fact, your report also mentions that China is the major element in the recovery of the developing nations. How do you view the prospects for India’s economy?

Rashmi Banga: If you look at our analysis, China has not lost that kind of growth in 2019, so it is expected to rebound and have much higher growth in 2020 and 2021 as compared to other developing countries.

In the case of India, it is estimated that there will be a loss of 5.9% in 2020 and then a recovery in 2021. India is estimated to grow at 3.9% in 2022 but eventually, 2% of growth will be lost between 2020 and 2021, which will never be recovered. Actions of the government will be very important at this juncture and will determine the future course of recovery for India.

One advantage that India has is its huge domestic market, as compared to export-dependent economies. That is what India needs to leverage. But it is important to first put money in the hands of people so that the aggregate demand grows. Different kinds of fiscal measures are needed, and we have argued that governments should not go down the path of austerity. Public investments are very important as a stimulus to domestic demand growth, while industrial and trade policies should aim at employment generation and ensuring proper wages to labour.

IBT: As far as SMEs are concerned, what are the challenges for them in the pandemic period, and what kind of support would they be needing?

Rashmi Banga: Our estimates show that the world will experience a “K”-shaped recovery, with a “V-shaped” recovery for the wealthy and a struggle for everyone else. SMEs are the most vulnerable at this point of time.

Many developed countries are already giving industrial subsidies in terms of cheaper bank loans, debt forgiveness and other stimulus packages to their SMEs and that is what India should also be doing.

But developing countries have a very restricted policy space in this area because of the WTO rules against industrial subsidies. UNCTAD proposes a temporary “Peace Clause” in the WTO and in the FTAs on pandemic-related government actions, which will enable them to provide much-needed support to their domestic industry, small and medium enterprises in the export-oriented sectors for better recovery. This will also enable countries to quickly adopt and use emergency measures to overcome intellectual property, data, and informational barriers.

This will also give countries like India the flexibility to put in place stimulus packages that are needed, especially for export-dependent SMEs in sectors like footwear, textiles and clothing, where there is a dominance of unskilled labour as well as existence of large informal sectors.

IBT: At this juncture when countries are relooking at sourcing strategies shift from China, we are talking about greater re-shoring and moving back production to their own backyards? What is the possibility of this and how could it impact developing countries?

Rashmi Banga: On one hand, developed countries are pushing for re-globalization as quickly as possible. But on the other hand, they are also talking about industrial sovereignty and want to re-shore manufacturing to build self-sufficiency in core areas such as food, pharmaceuticals, medical related products as well as in essential inputs used by their industries.

These policies will reshape the global economy with shorter global value chains, and reshoring of manufacturing to developed countries. Such policies may lead to, for example, more trade happening within EU, as compared to EU with the outside world. These changes in the global economy can be very challenging for developing countries like India.

Therefore, developing countries need to start strategising their existing value chains. India has already started a drive towards self-sufficiency. But self-sufficiency does not mean that you do not import any inputs. Instead, it means that you have to develop your own competitiveness to produce cost-effective inputs. Meanwhile, there is a need to rethink and re-strategize your trade policy, so that your value chains increase your competitiveness.

We are proposing that developing countries should strengthen their regional value chains, to improve their trade competitiveness. Many countries already have regional FTAs in place and tariff and non-tariff barriers in regional FTAs are generally lower. Especially a country like India, has a lot of potential to develop lead firms, which can form their own regional and global value chains. In many areas like textiles and clothing, India is linked to global value chains, but does not have lead firms. There is a need for India to form its own global and regional value chains so that domestic production becomes more cost-effective.

IBT: How has the role of digitalization in trade been growing post pandemic? Does this raise fears of a deeper digital divide that could threaten globalisation in the coming decades?

Rashmi Banga: There is a lot of confusion between ‘higher use of digital technologies’ and ‘higher digitalization’. The narrative being built by developed countries is that, many countries escaped the damage of the pandemic because of digitalisation; even SMEs were able to export their products via digital platforms. But it wasn’t digitalization, which saved these firms; it was the higher use of digital technologies. This also means that countries and people who did not have access to digital technologies during the pandemic were more adversely hurt.

So, the inequality really increased because of the digital divide, which is self-feeding. Countries and people who have access to digital technologies will recover faster, but those who don’t will face more inequality.

We have published a policy brief on South-South Cooperation in the times of COVID-19 where we argue that it has become more important for developing countries to build their digital infrastructure and improve digital competitiveness with a south-south digital cooperation agenda.

IBT: And do you think the push by developed countries towards greater globalisation and digital technology increased in the past few months? What kind of narrative are they using? 

Rashmi Banga: When developed countries were digitalizing, there were no global digital rules. They nurtured and developed their own digital sectors and technologies with unlimited policy space. But now a group of countries are negotiating digital rules under the Joint Statement Initiative, which, if agreed by developing countries, has the potential to severely constrain the policy and the regulatory space currently available to the latter for developing their digital sectors.

There will be attempts in MC12 to parachute these digital rules into the WTO and countries, which are outside the negotiating group, will be pushed to accept these rules. But WTO has a separate e-commerce work programme, where member states are discussing the development implications of e-commerce rules without any negotiations being launched. This provides the much-needed space to developing countries.

Just to give you an example, one of the digital rules being negotiated as an e-commerce rule proposes free flow of data. That means that no government can prevent any digital platform from taking data of its nationals outside the national boundaries. Now, we all understand the importance of data, not just personal data but also aggregate or non-personal data. Developing countries are trying to build capacities to process their data and use it to build their digital economies.

If free flow of data is allowed, then those with a first-mover advantage will process the data and customize production much faster than producers in developing countries. These customized products will be sold back to developing countries at much higher prices. It will be something like what is happening to the commodity exporters. They export primary commodities and finished products are sold back to them at three times the price. So, developing countries will give their data free of cost, and then that data will be used to customize products and sold back to them at a much higher price.

This also means that the domestic production in developing countries, which lack digital capacities, will have a much lower digital value-added content, and therefore these countries will lose their trade competitiveness over time.

Among other digital rules being negotiated are those around localisation of data and on source code sharing. Governments cannot ask digital platforms to process data within their national boundary, i..e., data localization will not be allowed and governments also cannot ask foreign firms to share their source codes, which is nothing but a digital technology or a language with which you tell the computer what to do with the data. So, if you cannot ask the foreign firms to disclose the source codes, that means you won’t be able to assess how much activity they have undertaken in your national boundaries and what taxes they should be paying.

Further, if digital companies come with joint ventures, then they will not be obliged to share their digital technologies with their domestic counterparts. This means that the digital technology transfers may never take place for which developing countries invite foreign firms.

All these rules can, therefore, severely restrict the policy space of developing countries. It is very important that developing countries do not allow the digital rules to be multilateralised and come into the WTO, until and unless they have developed a threshold level of digital competitiveness, and understand the developmental implications of these rules. This has been proposed by the Trade and Development Report of this year.

IBT: Another fact we observe is that while India has been developing a strong digital startup ecosystem, it has been heavily fuelled by investments coming from outside India. Does that make us more vulnerable and what is the model for India to follow?

Rashmi Banga: I have heard this argument a lot of times that India is becoming stronger day by day in the digital sector. But how will signing on to an agreement to restrict your policy space help the country? If a country is developing its competitiveness in the digital sector, it’s all the more reason that it protects its digital sector. That is what China did and it has now emerged as a global digital leader.

Foreign investments coming into any sector are good and healthy for the sector, provided these investments have the needed spillovers. This means that the domestic industry benefits from the presence of foreign firms in terms of technology, export and productivity spillovers. But foreign firms are here to make profits and not to strengthen domestic firms. This is the role of the national industrial and trade policies. The national policies should be such that the domestic firms are able to reap the benefits of the presence of foreign firms.

Foreign firms should be allowed to invest in the digital economy if they come as joint ventures, share their digital technologies and have strong domestic linkages with other sectors through sourcing of inputs. They should adhere to the objectives of generating employment and raising the share of labour income. They also need to pay domestic taxes to contribute to the domestic resources.

Some developing countries are able to do this with strict national policies in the digital economy, for example, enforcing data localization. These policies are also helping them in attracting more FDI and they are able to build their digital competitiveness.

This is what China did. Just a decade ago, China was an assembly hub for manufacturing products. Today, China is a digital leader, because it has preserved the policy space to develop its digital sector. It owns its data, has a data localization law, and has developed the capacity to process its own data. Therefore, China is progressing very fast in developing digital technologies.

It has been able to successfully transform itself structurally. Many other developing countries, for example Indonesia, are also putting in place national policies like data localisation to build their digital sectors. This is the way to go ahead.

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Rashmi Banga is a Senior Economic Affairs Officer & Officer-in-Charge of the Unit on Economic Cooperation and Integration among Developing Countries (ECIDC), Division of Globalisation and Development Strategies (GDS), UNCTAD. She is former Adviser and Head, Trade Competitiveness in Commonwealth Secretariat, where the Division provided policy support to more than 30 countries. She has worked as a Senior Economist in DFID-funded UNCTAD’s project which provided support to the Ministry of Commerce, India in its trade negotiations.

She was an Associate Professor of Economics in Jawaharlal Nehru University, India and has taught for nineteen years. She received her doctorate from Delhi School of Economics, specializing in development economics, international economics and econometrics. She has published extensively in refereed journals on digital issues, international trade, global value chains and FDI issues. She has recently published a book on “Gainfully Linking into Global Value Chains: Experiences and Strategies”. She has been awarded International Economic Development Research Award by Export-Import Bank of India and has been a recipient of two Gold Medals for her research on globalization and development from Global Development Network, World Bank.