Rewind. What’s wrong with a flat world

The flat world which Thomas Friedman spoke about in the book The World is Flat is getting somewhat bumpy. For sure, the world has reaped the benefits of globalisation. However, as in everything, the good is bundled with the bad and the unintended consequences of globalisation are now becoming manifest.

The flat world Freidman spoke about was about the benefits of globalisation due to advances in computational and communication technologies. Thanks to these advances, the outsourcing of manufacturing to China and software development to India became possible. This led to strong economic development, but China became a bigger economy than India. The Chinese economy, which was just 9 per cent the size of the American economy in 1993, is now 59 per cent! Along with Russia’s oil wealth and Brazil’s natural resources, China and India formed the vaunted BRIC economies, as globalisation and international trade expanded markets.

The advances in computing and communication technology brought, in their wake, advances in all sorts of other technologies, several hugely disruptive of jobs and businesses.

One of the unanticipated negative outcomes was loss of jobs, and high unemployment rates everywhere. The Eurozone slowdown, combined with the crisis in peripheral countries such as Greece, added to these woes. Businesses were also disrupted, such as the oil business, due to the technology of horizontal fracking. The price of crude oil cracked from $140 to $30 a barrel, destroying the OPEC countries and Russia.

The BRIC countries are no longer the darlings of the investment world; Russia has economically succumbed to falling oil prices and the effects of international sanctions. China had grown too fast, based on excessive debt, and has created bubbles in real estate and in the stock market. After decades of over 20 per cent export growth, China’s exports saw negative growth in November. Brazil’s economy has slumped with the fall in crude oil and other commodity prices.

Global factors are thus indicating a bumpy road in 2016. A sharper slowdown in China, which is likely, would cause problems. International trade has fallen, indicating that the low crude oil prices have not yet boosted demand. Ultimately, it would be the banks which have lent money, that would foot the bill and one hopes that there is no repeat of a global crisis that occurred in 2008. Global debt levels are far higher than 2008.

After the last crisis in 2008, central bankers mooted the idea of a Financial Regulatory Authority to prepare for the next crisis. India too formed a working group, which has submitted a report for the setting up a Resolution Regime for Financial Institutions. This report is yet to be given effect to, and must be acted upon with speed. A Financial Regulatory Board was to have been established by end-2015. The RBI is already concerned about the financial health of PSBs. India must prepare for another crisis by setting up the Financial Regulatory Authority and strengthening, or privatising, its PSBs.

The author is India Head, EuroMoney Conferences

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