Globalization itself is evolving, with changes in global trade flows, capital flows, and the Fourth Industrial Revolution. This has huge implications for India’s future. How well placed is India to benefit from the new face of globalization? Trade flows have attracted more attention than capital flows and technological changes as drivers of globalization. But the new technology is changing the global composition of trade flows. Trade in services are now increasing at a much faster pace than trade in goods. The cost differential in the production of services across the world is still enormous. The cost differential in traded services is much greater than in trade in goods. In the past, the only means to narrow such cost differentials was migration. However, global international migration has not increased but instead remained steady at about 3% for decades.
Technology has enabled services to be digitized and transported long distances at low costs without compromising on quality. The internet has enabled firms to sell services without crossing national borders, and dramatically increased the size and the scope for exploiting cost differentials in services compared to trade in goods. India’s trade characteristics are well aligned with the new face of globalization. Unlike China, India’s global trade has been spearheaded by exports of modern services. Global service trade also tends to be more resilient compared with the goods trade during global downturns. Overall, India is much better off today than before, thanks to the new face of globalization. But there are many challenges ahead.
Globalization of capital flows is also evolving with huge implications for macroeconomic management and growth. Some capital flow tends to be more volatile than others. Remittances, which tend to be more resilient, have been the dominant form of capital inflow into India. They have often exceeded foreign direct investment and other capital inflows in the past (see Rahul Anand and Ejaz Ghani, How will changes in globalization impact growth in South Asia, World Bank). But given that global migration trends are not increasing, remittances are not enough, and new policy instruments are needed to attract more long-term capital inflows to invest in India’s human and physical infrastructure. Many long-term investors, such as pension funds and insurance companies, which are ideally suited for human and physical infrastructure investments, see India as an important investment destination. There is increasing interest from global investors in solar power, water management, waste management, affordable housing and much more. Policy makers have many options to attract more remittances inflows, issue non-resident Indian (NRI) bonds, and attract NRI investors from countries with which India has a double-taxation agreement. There is also increasing interest, both from philanthropic and private foundations, in promoting public private partnerships and maximizing finance for welfare development.
Technology has become a bigger force of globalization, changing cross-border mobility of goods and services, and capital flows. New technological revolution has huge spillovers and externalities. Data and information technology is now the lifeblood of the global economy, fuelling ideas for new products and services, and advancing the transnational flow of trade, capital, and ideas. There are at least three times as many connected devices in the world today as there are people. The cross-border flow of digital information—searches, transactions, communications—has increased five-fold since 1990. The shift in value from physical to digital information services will only increase. The new era of innovation, in which cutting-edge technologies are replacing old production methods has impacted everybody. Latecomers to development, like India, face a bigger challenge compared to the US and UK, on how to capitalize on their comparative advantage, benefit from new technology, and create more jobs.
This is where the policy challenges come in. While investment in physical infrastructure has attracted the attention of policy makers in the past, investment in building human infrastructure has become even more important (see Ejaz Ghani, Reshaping Tomorrow, World Bank). Given India’s young population, and to benefit from its demographic dividend, India needs to dramatically scale up investments in human infrastructure. India’s demographic dividend suggests that 7-10 million people will join the labour force every year. But less than 4 million receive skill training. Early learning and stimulation interventions for children under three are virtually non-existent. Less than 17% of government schools provide one or two years of pre-primary education. Less than 15% of rural children in grade 2 can read at the expected level. Technological change has one key message: invest in people—through education, health, nutrition, social protection, and skills. Human development is the sturdiest way forward. If workers are to stay competitive against machines they need to be able to learn new skills and be better trained from the start.
India faces a dual challenge—demographic dividend and rapid technological change. Technological progress is placing a higher premium on skills, and any failure of countries to lay the groundwork for their citizens to lead productive lives will not only carry high cost, it will also generate more inequality and conflict. In most countries, children born to more affluent parents start having access to better opportunities early in life, and these lead to lifelong advantages, whereas children born to poorer parents miss out on these opportunities. If policy makers make more effort to make early childhood development programmes universal, income inequality would fall.
Technology is now the largest sector of the world economy, eclipsing even financial services, and includes five of the top 20 public companies by market capitalization. Spillovers and externalities associated with the Fourth Industrial Revolution are global in nature and call for global coordination as well as national level interventions. Late comers to developments can better manage trade-offs between economic growth and environmental degradation, thanks to technological progress that can increase both economic growth and better management of resource. Scaling up investments in human capital to promote growth and prevent digital divide is an easy call for the policy makers.