When the foreign exchange reserve was depleting, the central bank of Nepal advised the government for taking stringent measures to protect the economy from further sliding and maintaining economic stability. And following the situation, the Government of Nepal put restrictive measures on importing some commodities, which were deemed luxuries. A timely intervention was called for the sustainability of the economy from further deteriorating it.
The global recession trend has been taking its toll on South Asia irrespective of other countries in the world. We have been aware of the situation in Sri Lanka through the news and the situation is also not favorable in Pakistan as well. The alarm bell is ringing for awakened measures to protect our economic well-being.
Since the beginning of 2022 and after the unprovoked and unjustified aggression of Russia against Ukraine, a forcefully imposed war on a weak neighbor by a much mightier in military strength, on February 24, the world has undergone a sea change in global politico-economic stability and mobility. Whether Moscow calls it a “Special Military Operation” in Ukraine but Kyiv and the West deny it vehemently blaming Moscow for an unjustified war of aggression. It is a kind of hegemony of Russia towards its small and weak neighbor. A sudden jolt and breakdown in the supply chain of major products including natural oil and gas in the global market, has created a ripple effect worldwide with whopping inflation in prices.
With the beginning of the war in Ukraine, we in Nepal directly felt its market shock when the market took an inflationary trend unchecked with the price of daily essentials increasing on daily basis like edible oil and gasoline. Since both the countries Russia and Ukraine hold a comparative advantage on certain agricultural and industrial products, it was obvious that the market responds to the effect of war with a price increase. Despite being a major producer and supplier of oil and gas, Russia also holds significance in global trade and commerce. Ukraine and Russia are major global wheat suppliers. Ukraine is a significant producer of corn and sunflower oil.
A global economy, which was heavily suppressed by the COVID-19 pandemic and had exposed its vulnerability is undergoing a stress test again after the effect of the Ukraine war with multiple exposures to the economic weakness of globalization and heavily interdependent market system which has been putting policymakers of the world at a pressure to contemplate for a policy reversal. Most of the weaker economies of the world have held an adverse effect on them and leaders are hell-bent to protect their fragile economies from becoming failures. Policymakers around the world are struggling to tackle the emerging economic crisis.
During the pandemic, China successfully absorbed the economic shock and navigated its economy from its repercussion swiftly taking control of the pandemic and maintaining medical supplies globally. China also maintained its industrial export uninterrupted in the global market system, which proved its economic strength and shock-absorbing capability in comparison to other competitors. While at the same time, the United States is losing its comparative advantage against its global competitor because of widening its trade deficit alarmingly to a trillion dollars and losing global significance. It is, thus, the United States, the main benefactor of globalization, and Adam Smith’s “The Wealth of Nations” is rethinking of reverting to protectionism, while a socialist country China, which is thriving under globalization, is advocating for internationalism and globalization.
With the fall of the Berlin Wall and Francis Fukuyama’s announcement of the End of History, the age of the emergence of globalization and liberalization grip the whole world ensuring economic prosperity, but it looms large that the rise of China and the trade war between them followed by the Covid pandemic, the world is once again dissipating towards the protectionism.
Since globalization took its hold during the Presidency of Ronald Regan in the USA and Margaret Thatcher in the UK, which brought unprecedented economic prosperity and change globally that culminated with financial shock in 2008 in the USA. The election of Donald Trump in the United States and the announcement of his economic policy of “America First” had called for national priorities and patronization in economic dealings. The Trump administration also used the pandemic to pull back on global integration. In fact, with the rise of Brexit syndrome followed by the propagation of US President Trump -“America First” and Modi’s utterances- “Make in India” (Dr Shanker P. Sharma, BIMSTEC: issues Challenges and Way Forward, IFA, 2018.) created a breeding ground for “economic nationalism,” which gradually got momentum all over the world. The Brexit vote is interpreted as a right-wing backlash against regionalism and globalization and a wave of retreat from extensive regional engagement (Madhu Raman Acharya, SAARC: Political Imperatives and Way forward, IFA 2018).
Complemented by the pandemic and war in Ukraine, the global economy is undergoing a shock and calling for therapy, remaking and restructuring more likely reverting towards an anti-liberalization for the protection of larger national interests. If it catches hold, globalization would most probably revert to de-globalization.
Globalization has its disadvantage in the specialization and optimization of the market for certain products creating benefits on market anomalies and monopolies such as the oil market. It also creates a complex system of interdependence. The global economy is seeing unprecedented stress due to market vulnerabilities and inflation but the major producer including OPEC and other suppliers of oil are not concerned about increasing the production output and checking the hyperinflation instead they would like to make benefit from the market deformities.
This is where the regional trade blocking and economic cartelling would hurt the smaller economies that lack manufacturing alternatives on a larger scale. At the time of a global crisis of this scale, global power would step in for building regional blocking to protect their interest by extending or enlarging the scope of influence politically and economically forcing deep interdependence.
To place one’s primacy in the global power balance, the formation of regional power alliances, and the pursuit of strategic and manipulative measures to contain others are rising. Putting economic sanctions, trade-restrictive measures, and financial restrictions are common instruments used by superpowers against others, which would ultimately discourage the liberal economic world order.
Since the world is undergoing political and economic upheavals unprecedented after the 1930 global depression and the end of the Second World War, the result may end up with a shift in global power equilibrium favorably to China but most likely, if the global security threat is not resolved amicably and prudently, the western economic persuasion would support for protectionism.
