Asian economies

Context: The post-pandemic global economy has often predicted that China’s appeal as a business destination would fade.

What are the various strategies that can be pursued post pandemic global economy?

• ‘China +1’ strategy: The combination of the trade war and the COVID-19 crisis has resulted in firms establishing relatively small-scale operations elsewhere. This is perceived as a buffer against being completely dependent on China.
• There are three reasons for firms to remain in China and pursue this strategy:
  • Starting an enterprise and maintaining operations in China are much easier than elsewhere.
  • Chinese firms are agile and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown.
  • Many global companies have spent decades building supply chains in China. Hence, getting out would mean moving the entire ecosystem, which involves time and expenditure.
• Regional Comprehensive Economic Partnership (RCEP): Asia’s growth would hinge on the role of trade and investment flows into these economies.
  • This is expected to be the centrepiece of global growth, as the 15 member countries account for nearly 30% of the global GDP.

The RCEP and the ‘China +1 strategy’ is likely to impact investment flows into Vietnam, India, Bangladesh and Indonesia, which have emerged as key investment destinations.

Suggest steps which can be pursued by countries like India to deal with the changed economic scenario.

• Public Investments: The task of increasing domestic public investments, which have a central role in economic activity, for both demand and supply sides.
• In India, even before the pandemic, the growth in domestic investments had been weak, and this seems to be the right time to boost public investments as interest rates are low globally and savings are available.
• Major overhaul in trade policy: World trade had been rattled by tendencies of rising economic nationalism and unilateralism leading to the return of protectionist policies.
• The two effects of the RCEP: the ‘Walmart effect’ and a ‘switching effect’.
• The first would sustain demand for basic products and help in keeping employee productivity at an optimum level, but may also reduce wages and competition due to sourcing from multiple vendors at competitive rates.
• Switching effects would be an outcome of developed economies scouting for new sources to fulfil import demands, which requires firms to be nimble and competitive.
• Export diversification:  Major fallout of this ‘policy dualism’ is the dampening of export diversification. The challenge is to make exporting activity more attractive for all firms in the economy.
• Increase women’s participation in the labour force: Women’s labour force participation rate has fallen from 42.7% in 2004–05 to 23.3% in 2017–18. This means that three out of four Indian women are neither working nor seeking paid work.
• Globally, India ranks among the bottom ten countries in terms of women’s workforce participation.
• India could gain hugely if barriers to women’s participation in the workforce are removed, for which the manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

Way forward

• India’s approach to the changed scenario needs to be well-calibrated.
• The intensity of competition is evident from the fact that after India passed three labour code Bills on September 23, Indonesian Parliament on October 5 passed a legislation that slashes regulations contained in more than 70 separate existing laws, to open up the country to more foreign investment.

Air India: Knowledge Base