Ex­plain­ing global re­cov­ery amid po­lit­i­cal re­ces­sion

Financial Nigeria Magazine - - Contents - By Michael Spence Michael Spence, a No­bel lau­re­ate in eco­nomics, is Pro­fes­sor of Eco­nomics at NYU's Stern School of Busi­ness. Copy­right: Project Syn­di­cate

In the sum­mer, as life slows down, there is space to re­flect on fun­da­men­tal is­sues. One of the key puz­zles oc­cu­py­ing my mind of late is the dis­con­nect be­tween wide­spread po­lit­i­cal dys­func­tion and rel­a­tively strong eco­nomic and fi­nan­cial­mar­ket per­for­mance.

To­day, the world's ma­jor economies are ex­pe­ri­enc­ing a steady re­cov­ery, de­spite the oc­ca­sional set­back. To be sure, eco­nomic per­for­mance is far from reach­ing its full po­ten­tial: de­pend­ing on where one looks, one can find out­put gaps, ex­cess lever­age, frag­ile bal­ance sheets, un­der-in­vest­ment, and un­funded longer-term non-debt li­a­bil­i­ties. Still, fi­nan­cial mar­kets show no signs of con­vul­sion, even as mon­e­tary stim­u­lus is grad­u­ally with­drawn.

Yet, at the same time, po­lit­i­cal con­di­tions seem to be de­te­ri­o­rat­ing. Po­lar­iza­tion has in­ten­si­fied, owing partly to grow­ing re­sis­tance to glob­al­iza­tion and the un­bal­anced growth pat­terns that have re­sulted from it. In the United States, for ex­am­ple, the Pew Re­search Cen­ter re­ports that peo­ple not only dis­agree ve­he­mently with their com­pa­tri­ots on the other side of the aisle; they also don't like or re­spect them.

The po­lit­i­cal grid­lock long fu­elled by Amer­ica's right-left di­vide has now be­come en­trenched within the Repub­li­can Party, which con­trols both houses of Congress and the White House. So far, Pres­i­dent Don­ald Trump's ad­min­is­tra­tion has only ex­ac­er­bated this in­ter­nal tur­moil, while of­fer­ing none of the hoped-for eco­nomicpol­icy shifts that might el­e­vate in­vest­ment and growth and boost qual­ity em­ploy­ment. While it is hard to de­tect the Trump ad­min­is­tra­tion's pri­or­i­ties at this point, it would be hard to ar­gue that they in­clude a con­certed and nar­row fo­cus on poli­cies de­signed to make growth pat­terns more eq­ui­table and sus­tain­able.

In the United King­dom, last sum­mer's vote to leave the Euro­pean Union sur­prised many, and con­cerns across the EU were height­ened when Prime Min­is­ter Theresa May took over and com­mit­ted to se­cur­ing a “hard” Brexit. Now that Bri­tish vot­ers have stripped May of her par­lia­men­tary ma­jor­ity in June's snap gen­eral elec­tion, the out­come of the com­ing with­drawal ne­go­ti­a­tions – and the fate of the postBrexit UK – has be­come even more un­cer­tain.

Lead­ers in Europe, as well as in a num­ber of emerg­ing economies, have now con­cluded that both the UK and the US are un­pre­dictable and un­re­li­able al­lies and trad­ing part­ners. Asia, with China in the lead, has de­cided to go its own way. In­ter­na­tional co­op­er­a­tion on eco­nomic and se­cu­rity mat­ters – never easy – seems to be un­rav­el­ling.

In this con­text, the global econ­omy's re­silience – at least so far – is all the more re­mark­able (though it is of course im­pos­si­ble to know how the econ­omy would be per­form­ing in a more sta­ble po­lit­i­cal en­vi­ron­ment). There are sev­eral pos­si­ble (and non-mu­tu­ally ex­clu­sive) ex­pla­na­tions for this coun­ter­in­tu­itive state of af­fairs.

For starters, in­sti­tu­tions built over time now limit the ca­pac­ity of po­lit­i­cal lead­ers and leg­is­la­tors to af­fect the econ­omy. While these in­sti­tu­tions can im­pede the im­ple­men­ta­tion of pos­i­tive poli­cies, they also serve to min­i­mize eco­nomic and in­vest­ment risk.

Par­tic­u­larly on the in­ter­na­tional front, politi­cians can­not eas­ily bring about a dra­matic and im­me­di­ate re­ver­sal of the pat­terns of glob­al­iza­tion that have been es­tab­lished in re­cent decades. Any at­tempt to do so – un­doubt­edly fu­elled by in­ten­si­fy­ing pop­ulist and na­tion­al­ist pres­sures – would cause se­ri­ous eco­nomic dam­age, ul­ti­mately de­plet­ing the po­lit­i­cal cap­i­tal of those who spear­headed it.

An­other, more wor­ry­ing pos­si­bil­ity is that risks are ris­ing faster than per­cep­tion of them. If this seems im­plau­si­ble, con­sider the 2008 global fi­nan­cial cri­sis, in which lax reg­u­la­tion and in­for­ma­tional asym­me­tries led to a pat­tern of rapidly ris­ing risk and deep­en­ing im­bal­ances that were, for the most part, ob­scured from view.

In the cur­rent con­text, the cu­mu­la­tive ef­fect of ris­ing geopo­lit­i­cal ten­sions, loss of trust, and dis­re­spect for key in­sti­tu­tions could pro­duce ei­ther a large shock or just de­te­ri­o­rat­ing con­di­tions for in­vest­ment. But it is harder to con­struct con­crete sce­nar­ios than it is to ig­nore the po­ten­tial risks we face.

Hav­ing said that, there is a more hope­ful ex­pla­na­tion, to which I sub­scribe, at the risk of be­ing la­belled an ir­ra­tional op­ti­mist. The inequal­ity of op­por­tu­nity and out­comes that have fu­elled pop­u­lar dis­con­tent and po­lit­i­cal po­lar­iza­tion are very real, and, af­ter years of ne­glect, they are fi­nally get­ting the at­ten­tion they de­serve.

More con­certed at­ten­tion to so­cial co­he­sion will not bring quick re­sults. But, over time, it can help to re­duce par­ti­san in­ten­sity, re­fo­cus cit­i­zens' at­ten­tion on their com­mon val­ues, and re­store their lead­ers' ca­pac­ity to de­lib­er­ate re­spon­si­bly and im­ple­ment pol­icy. As al­ways, there will be dis­agree­ments – some­times sharp dis­agree­ments – about how to achieve shared goals. The key is to ad­dress them in a con­text of rel­a­tive mu­tual re­spect.

This sce­nario is far from guar­an­teed, but it is by no means im­pos­si­ble. Af­ter all, Em­manuel Macron's elec­tion as France's pres­i­dent, May's set­back on hard Brexit, and a near-univer­sal re­jec­tion of the Trump ad­min­is­tra­tion's stance on cli­mate change and a rules-based global eco­nomic or­der, both within and out­side the US, sug­gest that the cen­ter may be hold­ing.

In the mean­time, na­tional and in­ter­na­tional in­sti­tu­tional frame­works must con­tinue to guard against de­struc­tive ac­tions by po­lit­i­cal lead­ers. In the fi­nal anal­y­sis, con­fi­dence in these in­sti­tu­tions' re­silience – and in an even­tual end to the cur­rent po­lit­i­cal dys­func­tion – is what mar­kets seem to be bank­ing on.

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