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De-globalization is a growth gamble: A fireside chat with Prof. Viral V. Acharya

The former Deputy Governor, RBI, dissects geopolitical risks in conversation with Prof. Chetan Subramanian, RBI Chair Professor in Economics

18 January, 2025, Bengaluru: “The cost of de-globalization heavily bears itself on the balance sheet of the US economy”, said Prof. Viral V. Acharya, C.V. Starr Professor of Economics, Department of Finance, NYU Stern School of Business, during a fireside chat organized by the Public Policy Club at IIM Bangalore on 18 January 2025. The discussion on ‘De-globalization, Geopolitics, and Its Impact on Global Financial Markets’, moderated by Prof. Chetan Subramanian, RBI Chair Professor in Economics, offered profound insights into the challenges and implications of a shifting geopolitical landscape, particularly in light of China’s decisive entry into the global market.

A former Deputy Governor of the Reserve Bank of India, Prof. Acharya spoke of the broad retreat from globalization, or de-globalization, seen increasingly among nation economies. With a focus on US-China relations, the session unpacked how historical milestones such as the 2008 Global Financial Crisis, the US-China trade war of 2018, the Russia-Ukraine conflict, and recent political developments in the US and Europe have heightened concerns about de-globalization.

Systemic impact of geopolitical shifts

“The world is still grappling with China’s entry into the global economic landscape. This entry initially spurred growth for the US as it moved its manufacturing hubs over to China and reduced production costs while keeping a bigger share of the market”, shared Prof. Acharya indicating that US companies initially embraced China’s entry into their market. However, pointing to the shift in political leadership under President Xi Jinping as a turning point, he said, “China’s policies have become increasingly capricious, leading US businesses to no longer hold back their administrations from taking on an open tariff war”.

The session further probed how globalization has commonly been criticized for worsening income inequality, leading to concentration of wealth. “Do you now see de-globalization, its restriction on labor force—for instance, expediting automation and use of AI—further widening this inequality gap?,” asked Prof. Chetan.

“Tariffs make manufacturing more expensive, prompting companies to turn to AI and automation to cut costs,” Prof. Acharya explained. However, he cautioned that this approach, increasingly promised to the rising MAGA sentiment in the US under its new government administration, could fail to deliver the economic benefits promised by protectionist policies. “Ultimately, the solution lies in lowering manufacturing costs or investing in high-impact skilling efforts to move workers up the value chain and prepare them for available jobs,” Prof. Acharya emphasized.

India’s role in global financial markets

The conversation turned to India’s role in global trade. To whether the RBI has been too conservative in its approach to managing the rupee, Prof. Acharya offered the interpretation that the apex body could have adopted the policy to support the government’s foray to into infrastructure over the last few years. However, he also stated, “I don’t think the RBI is trying to target a particular level but rather manage excessive exchange rate volatility. I think the rupee’s volatility in the last 2 years, barring the last 2 months, was extraordinarily low”.

Rising debt ratios and the dollar’s dominance

The discussion also touched on escalating global debt ratios, particularly in advanced economies, and a potential threat to the dominance of the U.S. dollar. Addressing concerns about high inflation, higher interest rates, and the looming threat of a debt crisis, Prof. Acharya shared, “Many challenges traditionally associated with developing economies, such as financial repression, protracted growth, and high inflation to manage government debt, are now evident in developed economies of the world as they grapple with the aftermath of the COVID-19 pandemic”. While it might appear to be more vulnerable, “I don’t see any immediate threat to the dollar”, he stated.

Role of climate change in global trade

The fireside chat concluded with a discussion on the intersection of de-globalization and climate change. “Is de-globalization a climate threat?”, asked Prof. Chetan. “How can large corporations and institutional investors act as catalysts for the green transition?”

“No matter which government you are from, you will have to fight with the consequences of climate change”, observed Prof. Acharya. “If the US regresses from climate initiatives, it risks falling behind technologically, particularly as China positions itself as a leader in green technology”.

Expressing optimism about private players doing their part by investing in green tech, lowering carbon emissions, and solar and wind energy gaining momentum in parts of the US, he noted, “If governments lack on climate action, firms may themselves start committing to long-term targets”, suggesting that as long as major corporations outlive political administrations and timely motives, there will be a long-term focus on green transitions and incentivized innovation.