Recently a researcher at Harvard Business School with a focus on the long-term sustainable growth dynamics of countries has observed that a new global economy driven by size is emerging and that economic competitiveness is determined by several micro and macro-economic factors. While the micro-economic forces influence how businesses innovate in a competitive environment, the macro-economic policies affect the markets and opportunities that businesses thrive in and take advantage of. In addition to the economic forces, the environmental resources and geo-political conditions marked by war and peace present favorable or unfavorable conditions for the functioning of an economic system.
Talking about the global economy in the light of this research study, perhaps the environmental factors have taken a prime place in affecting both the macro and micro forces that shape the way the economic entities at aggregate or unit level would gradually adapt to do the business they do, that is maximizing growth or profits respectively.
Geo-political forces affect all nations
In a globalized economy, the geo-political forces in a particular region or range are affecting the rest of the world in one degree or the other. In my opinion, if it is all peace and no tension anywhere in the world, it is going to benefit all the countries as far as global trade or global financial system is concerned. However, who will gain more will then be determined by the level of competitive edge achieved through the interplay of numerous variables right from the degree of synchronization of the economic policies at national or regional level to the availability and quality of factors of production at the plant level in the domestic economy.
But if there is war at any territory on this globe, it is bound to affect the rest of the world in majority of cases, including the ones that boast of having an advantage in the short run due to disruption of global chain or any other factors. The more integrated an economy is with one or the other warring nations, or even the nations that are politically inclined towards either side, the more will be the impact of external shocks, and it may be difficult to insulate domestic economy from these shocks.
Size matters in global economy but should not be construed as the only factor
The Harvard researcher talks about the competitive advantage the UK had relished through its association with EU. Now after Brexit, that competitive advantage seems to have dissipated. Consequently, the UK’s ability to affect outcomes has also shrunk. Even in its domestic economy, economic growth is skewed in select regions that probably have better reach to science and technology and thereby having higher productivity than the rest of the UK. All this simply means that the UK’s key competitive advantage in the global economy is lost after Brexit. Further, he compares India’s consistent growth pattern with that of the UK and suggests that a new global economy driven by size is emerging and probably India is no exception. Recently, India outperformed UK and displaced it as the fifth largest economy in the world.
However, it is important to consider that even as the size matters, yet growth is an equation having a large number of variables which need to be mutually aligned towards a common goal of economic growth and having a neutralizing effect if any one or more of the variables go off the beat. India has demographic advantage, is creating manufacturing capacities to produce what China does, and has attractive and heavily regulated markets for foreign investors. Besides, India has a large consumer base to support high levels of aggregate demand for the domestic industry to respond to and match it with increase in aggregate supply. Markets are relatively decentralized in most sectors and so there is a fair deal of competitive business environment to support innovation and cost-effective methods for production and supply of goods and services.
No wonder, India has had a consistent record of sustained growth over last so many decades and has shown great deal of resilience even in uncertain times, be it Covid19 or Russia-Ukraine war and the resultant disruption of the global supply chains as well as too much surge in the oil prices. India is big, but being big is not the sufficient condition. I mean one may not take a generalized view such as ‘small is beautiful’ or ‘big is mighty’ so far as an economy is concerned.
Well, I think that at the end of the day it is not just the size that matters but how beautifully a nation combines its scarce resources in an optimum manner to achieve maximum satisfaction for the people that a country comprises of. For example, UK or India both can achieve high growth rates in their economies and low growth rates as well depending how well they align their economic policies and strategies at the domestic level in response to global threats and opportunities. Moreover, growth has to be gauged in terms of how an economy delivers to improvement in the quality of life of its people and not just the size of the GDP.
The key to growth is balanced regional development
The basic principles of economics suggest that big or small, both types of economies may have to work for creation of more and more job opportunities for the people unemployed or adding up to the labor force through balanced growth strategies across sectors as well as across regions. The logic is simple, the fruits of growth need to reach the pockets of the poorest of the poor and the people at the bottom of the pyramid at all sections of the society. The strength of the economy is built on the basis of improvement in the quality of life of the average citizen because a healthy and fit population will contribute more productively towards the wealth of a nation. The global economy is much more integrated and so any country which has a large number of skilled labor force and builds an eco system that supports research and innovation, investment and resource endowment, holds the key to sustainable growth dynamics.