Global Economy at Crossroads: Is Digitalization the Way Ahead?
Prerna Gandhi, Associate Fellow, VIF

“Transactional capabilities keep the lights on, but transformative capabilities make the organization stand out.” ― Pearl Zhu

The current global political upheaval has now come to be inextricably linked to the waning global economy. The rise of right-wing nationalism, populism, supremacism, protectionism and breakdown of international institutions meant to meaningfully monitor the global environment has come to suggest the failure of globalization. Bernie Sanders in his September 2017 speech at the Westminster College stated that “there is no moral or economic justification for the eight wealthiest people in the world having as much wealth as the bottom half of the world’s population, 3.7 billion people”1.

The massive inequalities in income and opportunities today, coupled with an aggressive social media and overall increased public awareness has led to differing narratives on the benefits of an integrated, global economy. Ray Dalio, founder of Bridgewater Associates, world’s largest hedge fund, has compared the current global milieu to resembling the years prior to World War II. His statement of “history shows us that economic conflicts cause political conflicts” bears a reiteration here2.

While key macroeconomic indicators such as real global GDP, private consumption, gross fixed investment, and world trade have all recovered to and even surpassed pre-crisis levels prior to the 2008 Global Financial Crisis, unemployment rates have not followed suit. Though policy tools such as ultra-low interest rates and quantitative easing have helped sustain recovery, many economists have attributed this recovery as a ‘jobless recovery’. The crisis around jobs is particularly acute this time, not just because of rising statistics of official unemployment worldwide, or the declining quality of available jobs and lack of suitably skilled people (for new avenues that are opening up). The problem in today’s post-crisis world is that policy makers and practitioners around the world are no longer sure how to create jobs, and just as, and perhaps even more important, how to create good jobs3.

While the virtuous cycle of growth leading to more jobs, and then, higher incomes translating into consumption, more growth… and then more jobs… and more growth… until a cyclical slowdown holds credence, it is mismatched to the current pace of technological disruption. Significant improvements in automation and productivity have dissuaded companies from creating formal employment, and incentivized investments in automation. This undercurrent of pessimism is further strengthened by the position of Trump administration on global trade and ongoing trade conflict between the US and China, that is largely responsible for the current global financial volatility. Concurrently, the export-growth economic strategies that rely on growing world trade in physical goods and cross-border capital investment will inevitably see a decline as global economy rears back to economic nationalism. Additionally, the unsustainability of current model of economic growth evidenced by growing environmental concerns and climate change remains to be addressed.

Further, with rising public debts across the globe, governments are at their ‘credit limit’ to push for more growth generated by monetary or fiscal measures. China’s debt binge has fueled massive concerns over a global economic meltdown. Even in India’s case, the growth has been capital intensive, rather than employment intensive. However, despite the fact, that the global polity is moving towards decentralization and precedence of politics over economics (once again), people, devices, services, processes and businesses continue to integrate digitally. And that is a fact that can neither be denied nor reversed. The number of people using the internet has soared from 900,000 to more than 3 billion. By 2020, their ranks are projected to exceed four billion, while the number of connected digital devices is forecast to more than triple, to nearly 21 billion. Global data flows, which have exploded by tenfold over the past decade, to 20,000 gigabits per second, are also projected to triple by 20204. The explosive growth in e-commerce—with an estimated $22 trillion in global annual revenue—is the clearest evidence of digital led globalization. In China, for example, e-commerce currently accounts for 15 percent of consumption, compared with just 3 percent in 2010, and is projected to account for more than 40 percent of growth in consumption through 20205.

‘Digitalization’ has led to falling costs of gaining access to and transacting business with customers in distant parts of the world, fundamentally altering traditional notions of scale and global competitiveness. Advanced data analytics is being used in areas such as product design, pricing strategies, marketing decisions, and the operation and maintenance of equipment to identify new segments of customers. In fact, companies that have learned how to carve out markets in this increasingly connected world have built large global businesses at an astonishing speed, such as Uber that has penetrated more than 80 countries in just six years. Thus what we see is not a breakdown of globalization but the emergence of a new globalization era, where there will be less political convergence on the agendas of the biggest economies.

Growth in this new phase of globalization will be driven increasingly by services, personal consumption, and trade in digital goods and not the erstwhile merchandise trade and cross-border investment that relied on cost advantage and scale economies. The new emerging forces backed by Digitalization have led to contradictory effects where growth in digital services and platforms has integrated many parts of businesses and the eco-systems in which they operate while simultaneously decentralizing global supply chains. Also while, the earlier phase of globalization was characterized by globally shared ‘rules of the game’ that were introduced and enforced by institutions such as the World Trade Organization and the International Monetary Fund, were strongly influenced by developed economies. In the current phase, the dominant role of Western countries in the multilateral financial institutions that have provided global capital appears to be receding as new financial institutions emerge, such as the China backed Asian Infrastructure Investment Bank and the New Development Bank6.

In India’s case, it has clearly missed the manufacturing export opportunity China had in the 1970s. Growth has not been consistent across the country and is primarily in mid-sized factories and through informal employment. By promoting digitally enabled services, nurturing local expertise, enabling small and midsize enterprises (SMEs) to participate in global value chains, digitally empowering the self-employed etc., the government could bridge the gap in employment generation. Equal, if not more, priority should be given to the development of digital infrastructure, software-defined service platforms built on high-speed broadband networks, along with physical infrastructure. A massive revamp of the education system needs to be attempted, along with making ‘continuous learning’ a national priority. Companies, educational institutions, and government agencies need to collaborate to identify rapidly changing skill needs and offer programs to produce workers who are employable in the new global environment.

The Indian Government, on its part, seems to have grasped this change; new 'thrust areas' such as Digital India, Aadhar, Skill India, Start up India and Make in India, all focus on creating an ecosystem for the new digital era. While monetary and fiscal instruments have not reached the end of the rope for Indian economy (as it has in developed economies), but by accepting Digitalization as the way ahead India will have not just the ‘transactional’ but ‘transformative’ capabilities to adjust to the changing times.

  6. Ibid, No. V.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>

Image Source:

Post new comment

The content of this field is kept private and will not be shown publicly.
6 + 10 =
Solve this simple math problem and enter the result. E.g. for 1+3, enter 4.
Contact Us