THE OTHER SIDE
Adecade back, economist Dani Rodrik described democracy, national sovereignty and global integration as an “inescapable trilemma” of the 21st century political economy. Much earlier, in 1962, another economist, Robert Mundell, had argued that fixed exchange rates, an independent monetary policy and a liberal capital account form an “impossible trinity”, which also implies loss of sovereignty in macroeconomic policies. Since the election of Donald Trump as US President, and his declared economic policy objectives, the issues raised by Rodrik have found new life.
The substance of the “inescapable trilemma” is best summarised in Rodrik’s recent web blog. His worry is that “an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalisation as a way of imposing its policy priorities. What globalisation does for these groups is actually to expand their political opportunities, rather than constrain them. In effect, globalisation becomes an instrument for narrowing the scope of what governments can do (in taxation, spending, and regulation) so as to advance the interests of this particular oligarchy”. In a way this is also seen in our own country in different policy areas. One example is the limits on fiscal deficits (and public debt) recently recommended by a panel, which seem to be partly born out of worries about the sovereign rating. The other side is that this limits Delhi’s ability to make required investments in the economy. On a different, though equally important, policy issue, the rupee’s exchange rate is probably being determined more by global portfolio capital flows than by central bank policy.
But to come back to Trump, a few months back, Martin Wolf argued in an article ( Financial Times, May 24), “In Mr Trump’s case, the proposed slashing of federal spending on areas essential to the disadvantaged, to the quality of essential public services and to the provision of public goods is likely to be highly damaging to the welfare of many of his supporters… (Even before Trump), the economic forces driving greater inequality were also very powerful. Nevertheless, big errors were made, not least in letting the financial sector become so dominant. The evidence also demonstrates inequality is a choice, not a destiny.” Chances are that, if Trump succeeds in implementing his agenda, finance capital would become as powerful as it was before 2007. The choice of his economic policymakers suggests this: Both the treasury secretary and the head of the Economic Advisory Council are ex- Goldman Sachs executives and a major overhaul of the restrictions on proprietary trading, complex derivatives etc imposed by the post-2007 reforms are likely to be relaxed — or at least implemented with “a wink and a nod”.
As for the “real” as distinct from the financial economy, the Trump agenda is clearly anti-globalisation — renegotiating the free trade agreement with Mexico and Canada (Nafta), withdrawal from the Trans-Pacific Partnership and the Paris Accord on climate change, the trade dispute with China, building a wall on the Mexican border to reduce immigration, etc. All these and the many personnel changes at the top level, the trust only in some family members with few qualifications or experience suggest an ignorant, whimsical, feudal mindset. More than one advisory council on policy issues have been disbanded.
Some comments from the global media about Trump are worth quoting: “He cannot gauge our times, because his only gauge is his own self-exaltation” (Roger Cohen, The New York Times); “Trump rules over Washington as if he were a king and the White House his court” ( The Economist, May 17); “The present White House may be uncomfortably reminiscent of a medieval court, with its cliques and coerced displays of fealty, all taking place under the watchful gaze of a ruling family… Trump is a boastful, thinskinned praise addict” ( The Economist, June 17); “Envoys to Washington compare the Trump children to princes and princesses in a royal court ( The Economist, July 15). Are leaders like Trump getting elected one of the “inescapable” costs of democracy?
Should Trump’s policies matter to us? Perhaps not too much. Though he is the chief executive of the world’s most powerful country and the largest economy, at least in nominal exchange rate terms, the USA is no longer the dominant global economy. China and the European Union are as large and the two see eye to eye on most global economic issues, particularly trade and climate, which are important to us — it is free trade that has enabled developing countries narrow the income gap with the rich over the last 70 years.