Post-Covid globalization: can India replace China?

India could benefit more than China from the next phase of globalization. That’s according to Arvind Subramanian, senior fellow at Brown University’s Watson Institute for International and Public Affairs.

But that may not be enough to replace China.

David Dollar, a senior fellow at the Brookings Institute, argued that globalization was shifting in India’s favor, not China’s.

“China has been doing so well for so long that it’s a bit closer to the border than India,” Dollar said.

“Let’s say China is about a third of the per capita GDP of the United States. India is probably, you know, 11% or 12% of that. So it’s just the fact that China has done so much better for so longer in means it’s going to slow down because, you know, as you get closer to the border, your wages go up, capital isn’t as productive, and unless you make some changes, there’s a natural tendency for the economy to not stop converging, but certainly to converge at a slower pace.”

Simply put, India has a lot of idle resources and hence it can grow its economy by deploying these resources efficiently rather than developing new technologies.

But Udayan Roy, professor of economics at Long Island University, does not subscribe to this thesis.

“We have heard this thesis many times before,” Roy said. “The inefficiencies in the Indian market run very deep in the commodity and resource markets, and I don’t see any improvement in the near future. For example, take the labor market, where companies with more than ten people cannot laying off workers. This is a disincentive for companies to grow and achieve economies of scale.”

In addition, there are comfortable relations between the government and big business (crony capitalism) in several sectors of the economy like utilities, telecommunications, transport, energy and banking, limiting competition and wasting the resources.

“For example, banks allocate resources to businesses based on political rather than economic criteria,” Roy said.

Dr. Guo Yu, senior analyst for Asia-Pacific at Sibylline, takes a middle-of-the-road approach, seeing the two countries playing a vital role in the next stage of globalization.

“As major economies, China and India are significant impediments to the globalization of trade and supply chains,” he said. “And both economies have derived significant benefits from globalization. India and China are at different stages of development, so it is not conducive (or useful) to contemplate the idea that one replaces the other.”

Yet Dr Yu sees India capitalizing on its young workforce and democratic institutions while China faces an increasingly hostile geopolitical environment.

“India enjoys growing advantages in labour-intensive mass manufacturing with its large young population, and its democratic political system often makes it a preferred partner for many Western economies,” Yu said. “By contrast, Beijing has faced a difficult, if not hostile, geopolitical climate in recent years, underpinned by an escalating strategic rivalry between China and the United States over trade and investment.”

But that does not mean that India will emerge a winner from the next phase of globalization.

“China’s insistence on maintaining the zero Covid strategy has caused significant disruption to business operations and supply chains and is seen as the antithesis of globalisation,” Dr Yu said. India can benefit from the loss of production in China, it does not have the capacity to replace China. Indeed, China’s relatively well-developed infrastructure, highly skilled labor force and large market with a rapidly expanding middle class continue to make an economy attractive to international business, despite political and geopolitical challenges.”

Meanwhile, Dr. Yu sees both countries playing a leading role in the next phase of globalization, at least in the Asian region.

“It is therefore not surprising to see new trade agreements such as RCEP and CPTPP to foster greater regional economic integration,” he said. “In addition to manufacturing and trade, the digital economy will also help shape future globalization.”

All of this may depend on whether globalization will survive the consequences of the Russian-Ukrainian war.

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