Syllabus: GS3/ Economy
In News
- The recent Economic Survey 2024-25 highlights a major global economic transition: the backsliding of globalization and the rise of geo-economic fragmentation.
- The past few decades saw increasing global trade, investments, and economic interdependence, the next era is expected to witness trade restrictions, economic realignments, and shifting supply chains.
In the Era of Globalization: 1980-2022
The following developments were largely driven by open markets, rapid technological advancements, and cross-border investments, leading to efficiency and economic growth.
- Demographic and Urbanization Growth: The world’s population grew from 4.4 billion in 1980 to 8 billion in 2022, with urbanization rising from 39% to 57%, driving global connectivity.
- Trade Expansion: Global trade as a share of GDP rose from 39% in 1980 to 60% by 2012, reflecting deeper market integration.
- Surge in FDI: Foreign Direct Investment (FDI) inflows grew from $54 billion in 1980 to over $1.5 trillion in 2019.
- Overall Economic Growth: The world economy expanded from $11 trillion in 1980 to over $100 trillion in 2022.
The Rise of Geo-Economic Fragmentation
Geo-economic fragmentation refers to a policy-driven reversal of global economic integration, guided by strategic and geopolitical considerations. This shift is characterized by:
- Trade restrictions and tariffs impacting cross-border commerce.
- Capital flow restrictions disrupting global investment patterns.
- Reorganization of supply chains due to shifting geopolitical alliances.
- Rising protectionism as countries prioritize domestic economic resilience.
Factors Driving Fragmentation
- Geopolitical Tensions: The re-emergence of Cold War-style economic blocs and “friend-shoring.” For example: China’s expansionism, Ukraine-Russia war, Middle East disruptions.
- Conflicts and security concerns reshaping trade relationships.
- Increased Trade Barriers: Trade-restrictive measures have surged, with WTO data showing that trade covered by new restrictions rose from $337.1 billion in 2023 to $887.7 billion in 2024.
- Technological Decoupling: Nations are imposing controls on semiconductors, AI, and critical technologies, leading to fragmented innovation ecosystems.
- Environmental and Social Standards: Western nations imposing one-size-fits-all labor and emission standards are contributing to global economic divisions.
Impact of Geo-Economic Fragmentation
- Trade Disruptions & Protectionism: Global trade growth has slowed down significantly, reflecting a secular stagnation in the world economy.
- Between 2020 and 2024, over 24,000 trade and investment restrictions were imposed globally.
- The IMF warns that today’s trade fragmentation is far costlier than during the Cold War, as goods trade-to-GDP ratios have risen from 16% to 45%.
- Reduced knowledge diffusion due to limited cross-border exchanges hampers innovation and productivity.
- FDI Relocation & Investment Realignment: Global FDI flows are now concentrated among geopolitical allies.
- Emerging markets face greater vulnerability, as they rely on FDI from advanced economies.
- Friend-shoring and reshoring of investments to allied nations create uneven economic opportunities.
- China’s Strategic Economic Dominance: China has gained a strategic upper hand in global supply chains, leveraging its manufacturing prowess and resource control:
- Electric Vehicles (EVs): Disrupting traditional players like Germany and Japan.
- Critical Minerals: Controls the global supply of lithium, cobalt, nickel, graphite.
- Renewable Energy: Produces 80% of battery components, 60% of wind turbines, and 80% of solar PV components.
- Rare Earth Processing: Processes 70% of the world’s rare earth minerals, vital for batteries, electronics, and defense.
- Outsourcing Reset: The world’s prior strategy of manufacturing dependence on China is now under reconsideration.
India’s Response: Amplifying Deregulation & Economic Freedom
As global markets become more restrictive, India must turn inwards and strengthen domestic economic engines. A pro-business regulatory environment can:
- Lower business compliance costs, boosting ease of doing business.
- Enable SMEs to drive employment and innovation.
- Make India a global manufacturing hub by attracting capital and technology.
- Improve resilience to external shocks by strengthening internal supply chains.
Path Forward: Deregulation & Economic Reforms
- Accelerating Deregulation: Removing unnecessary licensing, inspection, and compliance burdens on businesses.
- State-Level Best Practices: Encouraging states to adopt pro-growth policies from top-performing regions.
- SME Empowerment: Supporting small and medium enterprises to expand globally.
- Trade & Investment Policies: Despite global fragmentation, India must proactively engage in exports and foreign investments.
- Balancing Regulation with Freedom: Striking the right balance to unleash entrepreneurial potential and enhance competitiveness.
Conclusion: A New Global Economic Order
- The Economic Survey 2024-25 underscores a critical shift: globalization is retreating, and economic fragmentation is on the rise. Trade restrictions, shifting FDI flows, and China’s strategic dominance are shaping a new world order. In response, India must double down on deregulation, empower SMEs, and create an investment-friendly climate to position itself as a leading economic powerhouse.
Source: PIB
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