Toxic pol­i­tics ver­sus bet­ter eco­nom­ics

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­la­tion­ship be­tween pol­i­tics and eco­nom­ics is chang­ing. Ad­vanced-coun­try politi­cians are locked in bizarre, often toxic, con­flicts, in­stead of act­ing on a grow­ing eco­nomic con­sen­sus about how to es­cape a pro­tracted pe­riod of low and un­equal growth. This trend must be re­versed, be­fore it struc­turally crip­ples the ad­vanced world and sweeps up the emerg­ing economies, too.

Ob­vi­ously, po­lit­i­cal in­fight­ing is noth­ing new. But, un­til re­cently, the ex­pec­ta­tion was that if pro­fes­sional econ­o­mists achieved a tech­no­cratic con­sen­sus on a given pol­icy ap­proach, po­lit­i­cal lead­ers would lis­ten. Even when more rad­i­cal po­lit­i­cal par­ties at­tempted to push a dif­fer­ent agenda, pow­er­ful forces – whether moral sua­sion from G7 gov­ern­ments, pri­vate cap­i­tal mar­kets, or the con­di­tion­al­ity at­tached to In­ter­na­tional Mone­tary Fund and World Bank lend­ing – would al­most al­ways en­sure that the con­sen­sus ap­proach even­tu­ally won the day.

In the 1990s and 2000s, for ex­am­ple, the so-called Wash­ing­ton Con­sen­sus dom­i­nated pol­i­cy­mak­ing in much of the world, with ev­ery­one from the United States to a mul­ti­tude of emerg­ing economies pur­su­ing trade lib­er­al­i­sa­tion, pri­vati­sa­tion, greater use of price mech­a­nisms, fi­nan­cial-sec­tor dereg­u­la­tion, and fis­cal and mone­tary re­forms with a heavy sup­ply-side em­pha­sis. The em­brace of the Wash­ing­ton Con­sen­sus by mul­ti­lat­eral in­sti­tu­tions am­pli­fied its trans­mis­sion, help­ing to drive for­ward the broader process of eco­nomic and fi­nan­cial glob­al­i­sa­tion.

In­com­ing gov­ern­ments – par­tic­u­larly those led by non­tra­di­tional move­ments, which had risen to power on the back of do­mes­tic unease and frus­tra­tion with main­stream par­ties – some­times dis­agreed with the ap­pro­pri­ate­ness and rel­e­vance of the Wash­ing­ton Con­sen­sus. But, as Brazil­ian Pres­i­dent Luiz Ina­cio Lula da Silva demon­strated with his fa­mous pol­icy pivot in 2002, that con­sen­sus tended largely to pre­vail. And it con­tin­ued to hold sway as re­cently as al­most two years ago, when Greek Prime Min­is­ter Alexis Tsipras ex­e­cuted an equally no­table U-turn.

But af­ter years of un­usu­ally slug­gish and strik­ingly non­in­clu­sive growth, the con­sen­sus is break­ing down. Ad­vanced­coun­try cit­i­zens are frus­trated with an “es­tab­lish­ment” – in­clud­ing eco­nomic “ex­perts,” main­stream po­lit­i­cal lead­ers, and dom­i­nant multi­na­tional com­pa­nies – which they in­creas­ingly blame for their eco­nomic tra­vails.

Anti-es­tab­lish­ment move­ments and fig­ures have been quick to seize on this frus­tra­tion, us­ing in­flam­ma­tory and even com­bat­ive rhetoric to win sup­port. They do not even have to win elec­tions to dis­rupt the trans­mis­sion mech­a­nism be­tween eco­nom­ics and pol­i­tics. The United King­dom proved that in June, with its Brexit vote – a de­ci­sion that di­rectly de­fied the broad eco­nomic con­sen­sus that re­main­ing within the Euro­pean Union was in Bri­tain’s best in­ter­est.

The ref­er­en­dum hap­pened for one rea­son: in 2013, then­Prime Min­is­ter David Cameron feared that he would be un­able to se­cure suf­fi­ciently his Con­ser­va­tive Party base in the gen­eral elec­tion that year. So he pan­dered to Euroskep­tic vot­ers with the prom­ise of a ref­er­en­dum. The source of Cameron’s fear? The po­lit­i­cal dis­rup­tion caused by the UK In­de­pen­dence Party – an anti-es­tab­lish­ment party that ended up win­ning only one seat in Par­lia­ment and sub­se­quently found it­self lead­er­less and in tur­moil.

Now, it seems, the flood­gates have opened. At the re­cent Con­ser­va­tive Party an­nual con­fer­ence, speeches by Prime Min­is­ter Theresa May and mem­bers of her cab­i­net re­vealed an in­ten­tion to pur­sue a “hard Brexit,” thereby dis­man­tling trad­ing ar­range­ments that have served the econ­omy well. They also in­cluded at­tacks on “in­ter­na­tional elites” and crit­i­cism of Bank of Eng­land poli­cies that were in­stru­men­tal in sta­bil­is­ing the Bri­tish econ­omy in the ref­er­en­dum’s im­me­di­ate af­ter­math – thus giv­ing May’s new govern­ment time to for­mu­late a co­her­ent Brexit strat­egy.

Sev­eral other ad­vanced economies are ex­pe­ri­enc­ing anal­o­gous po­lit­i­cal de­vel­op­ments. In Ger­many, a sur­pris­ingly strong show­ing by the far-right Al­ter­na­tive fur Deutsch­land in re­cent state elec­tions al­ready ap­pears to be af­fect­ing the govern­ment’s be­hav­iour.

In the US, even if Don­ald Trump’s pres­i­den­tial cam­paign fails to put a Re­pub­li­can back in the White House (as ap­pears in­creas­ingly likely, given that, in the lat­est twist of this highly un­usual cam­paign, many Re­pub­li­can lead­ers have now re­nounced their party’s nom­i­nee), his can­di­dacy will likely leave a last­ing im­pact on Amer­i­can pol­i­tics. If not man­aged well, Italy’s con­sti­tu­tional ref­er­en­dum in De­cem­ber – a risky bid by Prime Min­is­ter Mat­teo Renzi to con­sol­i­date sup­port – could back­fire, just like Cameron’s ref­er­en­dum did, caus­ing po­lit­i­cal dis­rup­tion and un­der­min­ing ef­fec­tive ac­tion to ad­dress the coun­try’s eco­nomic chal­lenges.

Make no mis­take: solid and cred­i­ble pol­icy op­tions are avail­able. Af­ter years of medi­ocre eco­nomic per­for­mance, there is wide­spread agree­ment that a shift away from ex­ces­sive de­pen­dence on unconventional mone­tary pol­icy is needed. As IMF Manag­ing Direc­tor Christine La­garde put it, “cen­tral banks can­not be the only game in town.”

And yet they have been. As I ar­gue in The Only Game in Town, pub­lished in Jan­uary, coun­tries need a more com­pre­hen­sive pol­icy ap­proach, in­volv­ing pro-growth struc­tural re­forms, more bal­anced de­mand man­age­ment (in­clud­ing higher fis­cal spend­ing on in­fra­struc­ture), and bet­ter cross-bor­der pol­icy co­or­di­na­tion and ar­chi­tec­ture. There is also a need, high­lighted by the pro­tracted Greek cri­sis, to ad­dress pock­ets of se­vere over-in­debt­ed­ness, which can have crush­ing im­pact ex­tend­ing well be­yond the di­rectly af­fected. The emer­gence of a new con­sen­sus on these points is good news. But, in the cur­rent po­lit­i­cal en­vi­ron­ment, trans­lat­ing that con­sen­sus into ac­tion is likely to hap­pen too slowly, at best. The risk is that, as bad pol­i­tics crowds out good eco­nom­ics, pop­u­lar anger and frus­tra­tion will rise, mak­ing pol­i­tics even more toxic. One hopes that en­light­ened po­lit­i­cal lead­er­ship takes the reins in time to make the needed mid-course cor­rec­tions vol­un­tar­ily, be­fore un­am­bigu­ous signs of eco­nomic and fi­nan­cial cri­sis force pol­i­cy­mak­ers to scram­ble to min­imise the dam­age.

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