Northern Economist 2.0

Sunday, 1 January 2017

Looking Ahead to 2017

Economic historians will view the year 2016 as marking the end of the second great era of globalization that began in the late 1970s and picked up speed after the fall of the Berlin Wall.  The year 2017 will usher in continuing significant economic and political change, tumult and adjustment.  The three seminal signal events of 2016 - the Brexit vote, the election victory of Donald Trump and the Italian referendum –herald the new era.   Global economics and politics will be marked by restraint of trade, reduced mobility, populist politics, more extremism and continuing slow economic growth as a result.

The first great globalization from 1870 to 1914 was marked by the spread of liberal economic and political institutions, industrialization and rapid technological change especially in transportation and communication. The prosperity of the pre-1914 era was marked by the centrality of Europe both economically and politically and combined free markets and trade to create a world economy with liberal legal and constitutional institutions in its primary economies and the British pound as the international currency. Moreover, it was an age of free movement not only for commodities but also in terms of labor with mass migration from the old world to the new.

However, the pace of rapid change and economic integration created strains in a world of nationalism and imperial governments and the result was World War I.  The years from 1914 to 1945 marked the start of several traumatic decades in international economic and political history that included revolutions, the rise of communism and fascism, two world wars and the Great Depression.   A dominant feature of the period from 1914 to 1945 was reaction to a series of major international economic and political shocks.  We are embarking on a similar period – hopefully minus the specter of global armed conflict.

Despite the 2009 Great Recession, the world economy has grown dramatically over the last thirty years.  The prosperity of the world economy that has been driven by free markets, technological change and the global institutions led by post World War II America and the US dollar as the international currency has given way to an era of multi-polar economics and politics. The rise of China and Russia led by its business oligarchs has been aided by the liberal economic order, which has helped grow their economies and trade.  Indeed, autocratic oligarchs do well in a world of liberal economic and democratic rules that govern everyone's behavior but their own. Russian and Chinese business oligarchs buying property in Europe or North America to safeguard their wealth from their own capricious government action is the most obvious example of such behavior.

The people of the United States have now put in place their own set of oligarchs to counter a world that seems to be increasingly at odds with their own interests. Along with Donald Trump’s own economic status, the composition of his incoming cabinet leans toward ex-generals and billionaires – not much different from say how countries are run in the Middle East, never mind Russia or China. However, once everyone behaves like the oligarchs, growth of the economic pie will suffer.  Less liberal regimes in the rest of the world whose economies have benefited from the economic environment maintained by the framework of American diplomacy and power will definitely get more than they bargained for as trade barriers rise.   American policy will become even more inward looking and more explicitly self-interested.

The economic and technological progress of the last three decades owes much to the economic policies of the post 1970s – liberal policies ultimately rooted in the European Age of Enlightenment and the political movements of the early nineteenth century.  These liberal economic ideas include rule of law, free speech, representative democracy, majority rule but respect for minority positions, property and human rights, and the exchange of goods, capital and labor in free markets.  The result was more trade agreements, deregulation and some effort at more efficient government.

While the results of liberal economic policies can be imperfect and the benefits of trade and globalization unevenly spread, it remains that a retreat into populism and tariff barriers will make us poorer in the long run.  It will take time and tumult to illustrate the poverty of the road that the world is embarking on.  It will also take new ideas and policies on the part of free market and liberal economic advocates on how to better distribute the benefits of economic growth and deal with the labor market trauma of technological and economic change that has stoked populism.