When the economic history of our times is eventually written, 2016 will be remembered as the year in which the two countries that had laid the foundation for globalisation, free markets and prosperity in the early 1980s, switched course and chose to hit the stop button. It was the leadership of Ronald Reagan in the United States (US) and Margaret Thatcher in the United Kingdom (UK) which unleashed the forces of the free market within their countries and the forces of integration and openness elsewhere. It is with considerable irony that in both countries the long pause on globalisation was hit by leaders of the political parties of Reagan and Thatcher. What was started by politicians on the right of the political spectrum has been stopped by the politicians on the same side, surely a rare occurrence in the history of politics.
The triumph of the politics of anti-integration over the economics of globalisation portends danger for the global economy, particularly its poorest stakeholders. At no point in history have so many hundreds of millions of people been lifted out of poverty than in the last three decades. This is obviously attributable not only to the rapid growth of China and India, where the maximum number of people — also of poor people — resided but also to the growth of Africa and the former communist countries of Eastern Europe. Now, the economic openness of the world economy on the basis of which these countries have liberalised their own economies and alleviated poverty is under question. Going forward, there are reasons for pessimism, reasons for optimism and plenty of reason for introspection.
A Brief Rewind
Consider the state of the economies of the major nations when Reagan and Thatcher got started. The US and West Europe were suffering from stagnating growth and high inflation; the USSR and East Europe were ever closer to bankruptcy; Africa and Latin America were near basket cases; China was just about taking first steps to overcome its economic isolation; South Asia as a whole was cocooned in poverty; only Japan and the East Asian Tiger economies had some signs of economic dynamism.
In a period of 25 years, after a sustained period of market reform, the situation was dramatically different; the US and Europe were in a boom (the latter having moved to even closer integration via a single currency); the USSR was long dead, Russia had achieved a reasonable equilibrium after chaos, and East Europe was on the fast track to growth; Africa and much of Latin America had long overcome the stagnation of the 1970s and 1980s; China was in the reckoning for global superpower; India had woken from its long slumber and growing at near double digits; the rest of the South Asia was not far behind; and East Asia continued to be dynamic. It seemed that Japan was the only dull spot in globalised economy.
That was until September 2008 when the spectacular collapse of Lehman Brothers and the subsequent near collapse of the global financial system changed the narrative. There were obvious questions in the US and UK (also Europe) about whether the free market revolution had gone too far, too fast without adequate regulatory oversight. But the legitimacy of global capitalism began to be questioned a couple of years later when it became apparent that government bailouts of large banks and finance companies had led to very limited changes in the practices, executive pay and risk-taking behaviour of global finance. At the same time, governments, which had financed large bailouts of the private sector, came under acute fiscal stress, triggering a second phase of the crisis in 2010-11, when some south European countries (referred to as the PIGS) faced serious debt crises.
Ironically enough, the backlash against what was a crisis essentially triggered by global finance and exacerbated by overspending governments ended up targeting the free movement of goods (open trade) and the free movements of people (liberal immigration policies)—a combination of both in the US and the latter in the UK. And to add to the irony, a crisis in capitalism was exploited not by parties on the left of the political spectrum, but on the hard right. Free trade and immigration provided relatively soft, and easily identifiable targets compared with the elite, in the shadow world of global finance. The fact that technological change and increased automation in both manufacturing and services were reducing jobs and depressing wages all along was often overlooked as more spectacular and visible shocks to the economies of the advanced West hit home.
Unfortunately, for the world as a whole, the trends for the near term do not suggest any immediate reversion to openness. There are three clear adverse trends to note:
First, the advanced economies of the West, potentially beyond the US and UK, are set to increasingly look inward.
On immigration, almost every advanced country will erect more barriers amidst political formations of the hard right. The rise of the hard right will force the conventional right to take stronger anti-immigration positions.
The appetite for opening up trade has already reduced—the World Trade Organization (WTO) is stagnant, the much-hyped Trans Pacific Partnership (TPP) is virtually dead. Second, automation (and artificial intelligence) is proceeding at a remarkable speed posing a complex challenge for most economies, even emerging economies like China and India. A recent World Bank study concluded that automation threatens 69% of existing jobs in India and 77% of those in China. If the predictions materialise, it will put countries on the defensive in terms of economic policy; never mind the fact that any jobs that are lost may be compensated by other jobs that are created. It is only realistic to note that any such transition would create losers in the short run and would require a different type of skill in the workforce.
The third trend has little to do with economics, but it will impact the global economy adversely. And that is the spectre of terrorism which has now engulfed a wide geography. Extremism is unlikely to ebb anytime soon. And the longer it creates terror, the stronger will be the backlash against openness in general.
The Silver Lining
It’s not all despair. Historically, every time the world has gone through a cycle of inwardness/autarky, islands of openness have shone bright. Consider how the tiger economies and the newly-industrialising countries of East Asia industrialised rapidly with pro-market, export-oriented trade strategies between the 1960s and 1980s when the global economy was hardly at its most open or integrated. The countries of Western Europe also gained from economic integration via the European Economic Community and European Union (EU) through the 1970s.
Now, in 2017, there is an opportunity for the emerging Asian economies to don the mantle and make the most of openness. China, in particular, has a lot to gain by looking outward. Even in a slowing global trade environment, there is a $18 trillion global market in merchandise trade of which China has almost 14%, around the same as EU and a little more than the US. Fortunately, the trends in automation suggest that the jobs which will be affected first are in a high to medium technology industries. It will take longer for automation to be commercially viable in labour-intensive industries.
To take full advantage of the opportunity, emerging economies of Asia must remain open to foreign trade and foreign investment. It is unrealistic to believe that just domestic firms and domestic markets will be sufficient to drive the kind of growth emerging Asia needs. Equally, it is critical to put the house in order and create enabling conditions for such investment and trade, primarily by building world class infrastructure and also by reforming labour and land laws.
The emerging economies in Asia can learn from the excesses of the capitalist system in the advanced economies and follow a different approach to financial markets’ liberalisation, for instance. That does not mean keeping systems closed, but evolving the right kind of regulation that is able to limit risks. On safety nets, emerging economies can learn from the failures of the West, and reorient their strategies.
For instance, rather than fiscally unsustainable and labour market-distorting doles, there can be a greater emphasis on skilling and re-skilling, the only guarantors of jobs in a technology-intensive world.
The Political Realm
The triumph of the politics of fear and the economics of inwardness in some of the most prosperous regions of the world need to be challenged. It is a formidable task for political parties and thinkers on the left, centre-left and centre-right of the political spectrum in the advanced countries. The left doesn’t, however, seem to have succeeded in presenting a credible alternative to voters despite the obvious crises in the current system. In the UK, for instance, Labour’s move further to the left under the leadership of Jeremy Corbyn has only marginalised its appeal. In France, the forthcoming election battle is predicted to be between the hard right and right. Even in emerging economies, the left is in a lurch. The Chinese Communist Party abandoned ideology long ago.
The populist left in Latin America has come a cropper, most spectacularly in Venezuela. In India, the left parties are less relevant than ever before and parties on the centre-left like the Congress have lost credibility with voters. The left has a real problem. In its zealousness for an ever greater role for the state in economic matters, it overlooks a historical fact — a heavy hand of the state is usually associated with corruption, rent-seeking, inefficiency, stagnation and inequality; none of which appeal to voters.
That said, there is room for modern centre-left and centre-right parties to reclaim lost ground. It is absolutely reasonable to have a contest of ideas and a contest in politics between varying roles for the state in a system which is fundamentally governed by efficient free markets. Smart regulation, for instance, is critical to the proper functioning of markets.
Functioning safety nets are required for those who lose out in transitions.
The problem is that many mainstream political parties, particularly in the advanced economies, on the centre-left and centre-right were lulled into a sense of complacency by the apparently unending prosperity of the 1980s, 1990s and 2000s. They failed to see the disaffection (on inequality, on stagnant wages, on joblessness) simmering under the surface. There was a cosy consensus in the mainstream, which was bound to be shattered.
Needless to say, grievances of the people need to be addressed in any democratic system but they should not require a lurch to the hard right or hard left, both of which are forces against prosperity. Perhaps the emerging economies of South and East Asia can lead by example and show that a richer and more equitable world is possible while retaining openness and shunning extreme ideologies. It is time for a new Asian Consensus. The world needs it to preserve and enhance prosperity.
Courtesy: Economic and Political Weekly