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‘The global economy is undergoing a ‘regime change’ today — India is the outstanding performer now’

A. Michael Spence is a Nobel Laureate and professor of economics emeritus at Stanford University. Speaking to Srijana Mitra Das, he discusses profound economic changes taking place worldwide — and the factors driving these:

Why do you say the global economy is undergoing a form of ‘regime change’ today?

Several things are occurring at the same time — when you add them up, economically, it makes for a different world. The first is, we had a long deflationary environment during the pandemic with relatively little inflationary pressure. This was mostly a demand-constrained economy. Now, that’s changed and quite suddenly — today, supply is the problem. Supply is constrained since a good part of the deflationary environment seen over earlier years came from a burst of productive capacity in emerging economies which were entering the global market. This is much less powerful now while the global economy is much bigger, with millions of new consumers in emerging markets expanding the demand side.

The second factor is, labour market behaviour has changed — many industries are having trouble recruiting with young people preferring to work in hybrid mode and many in stressful or dangerous jobs not wanting to return to these. The power of labour in a supply-constrained economy is rising, adding to the shift. Further, three scientific and technological transformations are occurring, which will shape a changed world with new rules.

Can you tell us about these transformations?
The ongoing digital movement has enormous potential to increase productivity with inclusive growth — in e-commerce, research in China, etc., shows the average distance between buyers and sellers is 1,000 kilometres now while in the offline world, this is five kilometres. That’s a dramatic expansion in the accessible market, giving everyone the outreach only big multinationals once had. Then there is artificial intelligence (AI) — think of the breakthroughs in image recognition algorithms, which can now even detect cancers from pictures or diagnose diabetic retinopathy. These could dramatically extend medical diagnostics and healthcare services. In the life sciences and biomedical fields, the costs of very powerful tools are reducing.


DNA sequencing once cost ten million dollars — a full DNA sequence now costs around a thousand dollars. These are helping scientists advance the boundaries of their fields. Many pose regulatory challenges but their potential to improve productivity is huge. A third revolution is the energy transition, for which we need carbon capture, solar expansion, etc. These three movements are simultaneous — and transformative.

How can India benefit from the digital movement while providing employment to millions?
India is a powerhouse in the digital and life sciences realms. It has a thriving digital ecosystem — and in India, instead of digital systems replacing existing retail systems, entrepreneurs and companies are building solutions to integrate existing and sometimes very small retail businesses into digitally enabled supply chains, making them more effective. This has been accelerated with the Jio revolution — mobile internet penetration proliferated and India’s data rates are among the lowest in the world now, inspiring an incredible explosion of entrepreneurial activity. I think the net effect of the digital revolution in India will be to create employment — it’s not the whole solution for jobs but it provides businesses opportunities and lets them scale up. With policy and incentives, digital advantages can be steered to employment creation rather than reduction.

Has America staved off a recession — and what will determine if China can do so?
On America, not necessarily — but this is a very confusing economic environment. We have high inflation and interest rates with tight labour markets. This is related to the ‘regime change’ we talked about earlier and a fragile global economy, with Europe facing an energy crisis. China still has high growth potential but many challenges in the short run — its zeroCovid policy, its very aggressive regulatory approach to the digital economy earlier and major imbalances in its property sector means China will have an unusual period of some years of subpar growth by its standards. No economy is immune from such chaos. In the US, the most likely outcome is a mild recession. We could escape that but it depends on inflation and the Federal Reserve. With China, if you go from 5.5% growth to 3.5% — which I think is too high — that’s a pretty big slowdown. I’m expecting changes in policy though in regulation and their Covid strategy.

Where does India’s economy figure in this moment of global ‘regime change’?
The Indian economy is the outstanding performer at this point — among the very large emerging economies, India has the highest potential growth at 7%-plus and is among the most attractive investment destinations now. It has all the ingredients. It’s not heavily dependent on any one growth engine whose might is fading — and its strengths are precisely in areas which are advancing in economic power. As elsewhere, there’ll be some bumps and public and private markets will need to make adjustments — but don’t get confused by the short-term stuff. I’m optimistic about India’s economic trajectory over the next decade. Views expressed are personal (You can also read ET Evoke’s interviews and articles online at:

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