Growing threats in the global economy

Mains Paper: 3 | Economy
Prelims level: Footloose finance
Mains level: Footloose finance plus unequal trade plus unaccountable corporations are posing challenges for policy makers everywhere.

Context 

• Since 2008, leading central banks have pumped trillions of dollars into the global economy.
• The big commercial banks at the centre of the crisis have recapitalized and financial markets have rebounded; government spending.
• In which initially it helped stabilize the global economy after the crisis.
• It has been squeezed; and wages have stagnated. 
• This economic mix has failed to generate robust recoveries in advanced economies, and with debt levels higher than ever and income gaps widening.
• The arc of politics has bent accordingly.

Threats to the emerging economy 

• Emerging economies were also hit by financial shockwaves but recovered more quickly, declaring themselves decoupled from the problems of the advanced world.
• In reality, much of their recovery was dependent on the liquidity splurge in advanced economies, triggering a borrowing spree, particularly by the corporate sector, as investors sacrificed caution in search of yield. 
• Though advanced economies have not done enough individually or together to rebalance the global economy, the worry now is that normalizing monetary policy could send shockwaves through capital and currency markets in developing countries.
• The damage is already apparent in some emerging economies but there are many others in a vulnerable position. Mitigating the problem is likely to be all the more difficult given the failure of post-crisis reforms.
• Way out 
• With big multinationals skimming the economic cream, many developing countries are putting their faith in disruptive digital technologies.
• It also hoping that widespread use of data intelligence will strengthen development prospects. 
• However, monopolization is, if anything, an even bigger threat in the digital economy than in the analogue economy. 
• The super platforms have been able, through strengthened intellectual property rights, first-move advantages and sheer market power.
• It has to establish a monopolistic hold over data that allows them to create super profits and to close down the possibility of newcomers entering the field.
• Developing countries are particularly vulnerable on both fronts.
• Active policy initiatives combining targeted industrial policies, tailored financing mechanisms and regulatory measures, including support for data localization.
• It will be essential along with south-south cooperation to ensure international agreements preserve policy space.
• The uncomfortable truth of our hyperglobalized world is that footloose finance plus unequal trade plus unaccountable corporations are posing challenges for policy makers everywhere. 
• But neither a retreat to nostalgic nationalism nor a doubling down on support for “free trade” provide the right response. 

Conclusion 

• In this world, deploying the big tariff guns will do little to correct the macroeconomic imbalances that lie behind the heightened anxiety of depressed northern communities or to break the Medici vicious circle of corporate political capture and rent-seeking behaviour.
• Calls for extending free trade will simply provide ideological cover for a world dominated by large, footloose corporations, where free trade agreements, while promising a level playing field and more inclusive outcomes.
• They  have curtailed policy space for developing countries and cut away protections for working people and small businesses, even as they have carved out more space for predatory international firms to boost their profits.
• Reviving multilateralism will only happen if trust can be restored to the system. 
• That will require rules for managing trade that can support commitments to full employment and rising wages, regulations for curtailing predatory corporate behaviour and guarantees of sufficient policy space to ensure countries can integrate into the global economy without compromising sustainable development goals.
• It’s too much of the talk about reforming the system is moving in the wrong direction.

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UPSC Prelims Questions: 

Q.1)  The policy of Import Substitution refers:
(a) Importing goods from a nation which has a comparative advantage in world economy.
(b) Importing of manufactured products to substitute the import of primary products.
(c) Substituting imports with domestic production.
(d) Increasing exports to have a favorable balance of trade.
Answer:  C

UPSC Mains Questions:
Q.1)  What are the threats to the emerging economy? How it can resolve?