Winds of Change Affecting Economies

Even in ordinary times, it is too much to expect consistency in economic policies from many governments. And these are anything but ordinary times. Yet, it is in turbulent times that we need consistent and relevant economic policies. Emerging from two years of a devastating pandemic, the global economy has had to deal with wild swings affecting business, lives, and policymaking.

Let us see how political change can affect economic policies amid all the turbulence that the global economy is already facing. Many countries have already held elections, or will hold them this year and the next. And in the midst of the waning Covid-19 pandemic on the one hand, and the war in Ukraine raging on the other, it appears that people in many countries want change in their political leadership.

Now that the pandemic is receding, let’s begin where Russia’s war with Ukraine is raging. The biggest concern in Europe right now is energy, what with another winter approaching. That ought to keep EU countries united and focused on securing energy supplies from places other than Russia and to negotiate long-term contracts. While that might be the larger, common goal, individual member countries are experiencing an accelerated shift to the political right. And it manifests itself most visibly as anti-immigrant, nationalistic, identity politics. The roots of this malaise are economic, and predate the Covid-19 pandemic, but the expression is often a demand for strong-willed leaders who pursue a muscular, nationalist agenda, even if they struggle to help ordinary folk. Much of this is against the values and the policies of the EU, of course, and recently we have had the EU push back against such governments, by holding back EU funds meant for Hungary, for example.

Now, Italy one of the four largest economies of the Eurozone has just elected a neo-fascist party-led coalition to power and soon it will form a government. Nobody knows for sure what Giorgia Meloni stands for, and media reports suggest that she is not anti-EU nor anti-Eurozone, but that she wants to build a strong Italy for everyone. Her strongest right-wing strand is anti-immigration, but that doesn’t help solve economic problems at home. Italy has the highest debt burden and has to implement serious economic reforms to be eligible for its share of the EU recovery funds. What the country needed is stability and continuity in the technocratic leadership being provided by Mario Draghi, but he ended up a casualty of coalition politics.

Fortunately, southern European countries are growing their economies at much faster rates than the northern ones at the moment. Nordic countries aren’t free from right-wing politics either; Sweden has just elected its right-wing Sweden Democrats to power, in a coalition, of course. And as you’d expect, the biggest plank of the election was anti-immigration sentiment, which is so out of character for a country that has always welcomed them and has the highest numbers of immigrants as a percentage of population. In a large western European country such as France, President Macron has managed to win another term, but his party has lost majority in parliament. It is going to make it tough for him to push through his set of reforms, most importantly, that of pensions reform.

The message across Europe then, is that the far right is on a steady march forward. The fact that most European countries helped people stay in work during the pandemic with generous schemes doesn’t seem to have assuaged the electorate; the dominant sentiment appears to be a hangover from 2015, when millions of migrants and refugees from Asia and Africa flooded into Europe.

The mood of the electorate seems to be changing; Image: Markus Spiske on Unsplash

The other big wind of change that is blowing across the political landscape is the one in Latin America. Quite in the opposite direction, though. Here, the electorate clearly want a centre-left government, one that will provide social and economic welfare to people as they weather the pandemic. Brazil had one of the worst pandemic death rates, with President Jair Bolsonaro dismissing Covid-19 as nothing more than a flu, much the way Trump did in the US. Chile had been fighting for a new constitution for over two years, and yet rejected the one formulated by the left-wing government as too radical! Colombia too has a new left-wing leader and the elections in Brazil which were just conducted a few days ago shows the former president and left-wing leader, Lula da Silva, in the lead, although there is a second round later this month.

Latin American countries are mostly commodity exporting nations and are extremely vulnerable to cyclical changes. Right now, when the global economy is slowing and large parts of developed economies are expected to go into recession, countries in Latin America are going to be adversely impacted. This, when their main buyer, China, isn’t growing its economy either, thanks to zero-Covid policies. The other consideration is that manufacturing is beginning to slow down, while services are only now emerging from the pandemic and growing at reasonable rates, which also affects commodity demand and production.

In China itself, this October is a big month for the Communist Party, when it will affirm Xi Jinping’s undisputed position as Chief, and will also elect its senior members to the politburo. Thanks to international trade wars begun by Trump and other western nations, China is no longer the country that openly professed free trade at fora like the World Economic Forum in Davos. It has been forced to retreat somewhat and to look inward and find its own strengths, which it is pursuing with a zeal that is unmatched. It had already embarked on an indigenisation programme under China 2025, but that has now been given new impetus quite inadvertently by the US administration.

Africa is a continent that showed some promise when many countries began to overthrow their old dictators and leaders in elections a few years ago. However, that was short-lived and thanks to the pandemic which largely went undetected, undocumented and untreated, thanks to poor health infrastructure and low availability of vaccines, I think most of the continent might have been set back by many years. Now, we also have the prospect of drought, famine and starvation, brought on by climate change and food shortages, especially wheat, for which many African countries depend on imports from Ukraine and Russia.

The US has mid-terms next month, in which the Democrats are expected to retain the Senate, but Republicans might take the house of representatives. President Biden has had modest success with his reforms and infrastructure plans, albeit watered-own, but a lot of the implementation will be tough in a terribly divided country. And in the UK, we have not only had a change of leadership in government, it has already done a volte face in economic policies in just the one month that it has been in power.

In such a volatile and uncertain environment, how does one make policy? It is clear to me that in developed, ageing economies, more of the older electorate that turns out to vote is focused on immigration and identity politics. In places like Latin America, where the electorate happens to be younger people, they are more interested in education, cost of living, jobs, and economic growth. The key is in not merely winning elections, but in providing governance that balances short-term exigencies with long-term economic growth.

The strange thing is that developed ageing economies are the ones that need immigrants more than developing, younger economies do; they need them to do the hard work, pay their taxes, innovate and grow these economies, besides funding the pensions system to look after the elders. Most of the older folk in developed economies are not only better off, they are the bigger spenders as well. Frankly speaking, countries such as the US, UK and western Europe need to seriously consider entitlement as well as pension reforms and target more of their welfare spending to help the poor.

The other big ticking time bomb in both developed and developing economies is rising inequality of income and wealth. Good governance requires that this be tackled on a high priority basis; unfortunately, so much of the 21st century has gone in tackling one crisis after another, all of which has required liquidity and easy money to be pumped in. Time for the great withdrawal of stimulus now, and not just because of soaring inflation.

The correction of imbalances within economies, many of which resulted from an overdependence on the financial and real estate sectors needs to be addressed. “Over-financialisation”, for want of a better word, has been the bane of the modern world and I am not sure that even the 2008 financial crisis has chastened the greed and rapacity that defines this century thus far.

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