Global Economic Strategy Shift Sparks Concern: Developing Nations at a Crossroads Amid Rising Security-Driven Policies

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The rise of security-driven economic policy in industrialized nations has ushered in a new era of inward-looking policy thinking. This trend is beginning to influence the development strategies of countries that stand on the verge of significant economic breakthroughs, such as India and Indonesia.

Geopolitical shifts in the global economic landscape are driving changes in economic policies. Today, strategic competition and conflicts have prompted the return of industrial policies in advanced economies. These policies are driven by security concerns and often take a second-best approach to the energy transition, lacking a price on carbon. This shift has resulted in an increase in trade interventions, industrial policies, and subsidies, posing a potential threat to the global economy by eroding the adherence to global trade rules.

For developing economies like India and Indonesia, the challenge lies in navigating this new policy environment, where self-sufficiency and import-substituting strategies are gaining favour. To address this, it’s crucial to draw lessons from the East Asian growth miracle, which remains relevant today. These lessons revolve around the significance of trade-oriented growth, deeper integration into the international economy, and the creation of public goods to lay the foundation for broad-based industrial growth.

The success of East Asian development, exemplified by countries like Japan, South Korea, Taiwan, Singapore, Southeast Asian nations, and China, was based on growth driven by participation in international markets and a commitment to global integration. Government investments were directed towards social and economic infrastructure, creating a conducive environment for broad-based industrial growth. The focus was on expanding market share in established industries rather than retreating from international trade or relying on import-substitution policies.

However, recent policy developments seem to disregard these lessons. The prevailing policy landscape is shaped by domestic events and geopolitical factors, potentially leading to stagnating growth in established industrial economies. Globalization appears to have plateaued, and a policy shift favouring self-sufficiency and import substitution is gaining traction worldwide.

Contrary to the prevailing notion that a less optimistic outlook for global market growth recommends inward-looking import-substitution strategies for emerging economies, the experience of successful industrial growth in Asia suggests otherwise. Development in the international economic context involves drawing abundant labour into increasingly productive employment, thereby increasing productivity and national incomes. Pro-development strategies favour export-specialization in labour-intensive products, boosting labour participation in competitive production and high-productivity employment.

In this context, even during periods of slow global growth, the logic of comparative advantage remains valid. Import-substitution policies hinder the transition to a more competitive export-oriented model by restricting access to cost-effective inputs, hampering the establishment of international competitiveness.

The East Asian economic miracle was marked by its complexity and variation, as each nation’s policies were influenced by different contexts and institutions. Nonetheless, embracing international competition and foreign investment was central to their rapid economic growth, facilitating access to inputs that absorbed domestic labour into productive manufacturing employment.

India and Indonesia, two promising candidates for transformative industrialization in Asia, are at a crossroads in their development paths. Their youthful populations and recent economic growth place them in a favourable demographic position. However, they must align their development strategies with the principles derived from the East Asian experience to unlock their economic potential and avoid the pitfalls of jobless growth. This entails emphasizing export specialisation, creating a conducive environment for international competitiveness, and investing in social and economic infrastructure to support broad-based industrial growth.

In a world where economic policies are shifting due to security concerns and self-reliance, these lessons from the East Asian experience provide a valuable compass for emerging economies looking to chart their course towards sustainable development.