“If we cannot end now our differences, at least we can make the world safe for diversity.” – John F. Kennedy (10th June 1963)
There’s an expanding cohort of states that are moving in an authoritarian direction and which are worrying the financial markets. John F. Kennedy (JFK) already knew that a wholly liberal-democratic world would be unlikely and he wanted to ensure that liberal democracies could live peacefully alongside other forms of government. After the Cold War, a kind of euphoria took hold in the West. The idea briefly arose that capitalist democracy would be unstoppable. Now China, Russia and others bely that conviction.
Earlier, it was often thought that the populations of authoritarian countries would demand more freedom once a certain level of prosperity was reached. Mostly, this did not happen at all or countries were caught by the middle-income trap before citizens started to worry about their liberties. Only 13 out of 101 middle-income countries in 1960 had become high-income economies by 2008. This phenomenon is increasingly important; five of the 7bn people on earth live in middle-income countries. These states represent a third of the global economy and often drive worldwide economic growth.
Prosperity in exchange for shutting up
In many of these countries – including China, Russia and Turkey as well – an implicit agreement between governments and people has applied (and often continues to apply) which dictates that the price for strong economic growth is political passivity, to put it mildly. Naturally, most regimes will not allow their citizens to abandon this ‘deal’ (as we have often seen in recent years).
There have been more and more signs in China recently that the authorities are tightening the reins and restricting freedom (even further) for fear of the painful side effects – including sluggish growth – of stabilising the credit system and transitioning from an export-oriented economy to a technologically advanced economy, powered by consumption.
Leaders in other countries are also shifting towards ‘authoritarian regime’ on the political spectrum. And whereas China has largely pursued a coherent and intelligible financial-economic policy – although disagreeable to many – leaders like Maduro in Venezuela and Erdogan in Turkey have brought their countries to precarious positions, with high FX debts, sky-high inflation, very unusual monetary policies, irresponsible government spending on vanity projects, large twin deficits and the loss of goodwill in the international arena.
Very fragile model
This takes us to the key trends at play around the world right now. Marian L. Tupy, connected with the libertarian think tank, the Cato Institute, wrote the following recently while discussing a book by Jonah Goldberg:
“Our rule-based society … a staggeringly complex global economy that turns strangers from different continents into instant business partners, and a meritocratic system of social and economic advancement that ignores people’s innate features…is both very new and extremely fragile… The forces of tribalism always linger just below the surface…From Russia and China to Turkey and, to some extent, the US, the all-mighty chieftain is back in charge.”
It remains to be seen if the world that JFK purportedly envisioned – in which democratic and authoritarian countries co-exist in relative peace – is viable. Leaders such as Trump, Putin, Xi and Erdogan, increasingly question the world-order mainly devised by the West. Winner-takes-all-capitalism, growing inequality, stagnating real wages, and large cultural and social change are all playing into the hands of the aforementioned leaders.
“The Glorious Thirty” is no more
The period roughly until the 1970s is often referred to as The Glorious Thirty (Les Trente Glorieuses). An era that was characterised – especially in the West – by a bountiful combination of high economic growth, increasing productivity, rising real pay, robust technological progress, and the steady expansion of the welfare state. Clearly, this period is now behind us. This has led to a lot of public dissatisfaction, the emergence of populism, and a more inward-looking mentality in many countries.
Various negative trends are coming to the fore:
From democratisation to a focus on identity and culture.
From a world of relative order to a world in chaos.
From interdependence to decoupling.
The forces of tribalism to which Goldberg and Tupy refer are fuelling these developments, and they will undermine global economic growth. Already, financial and trade wars are damaging free trade and putting alliances in jeopardy.
Red carpet rolling out for bears
From a political viewpoint, there is plenty of scope for bears. Growth, international production chains and other forms of globalisation are under threat from identity politics, the erosion of institutes that have underpinned safety and economic growth in the past seven decades, and protectionism.
Populists rule Italy, Austria, Hungary and Poland. Right-wing populists are leading the polls in Sweden and are runners-up in Germany. Intolerant nationalism, xenophobia and illiberalism are the hallmarks of most of these parties and politicians.
Only 13 out of 101 middle-income countries in 1960 had become high-income economies by 2008. This phenomenon is increasingly important; five of the 7bn people on earth live in middle-income countries. These states represent a third of the global economy and often drive worldwide economic growth.
Let us not forget that Europe is more exposed than many realise. To provide an example, Hungary did well in the Freedom House index during the period 2005-2010 but it all went downhill from there. Countries such as Greece, Spain and Portugal were suffering under authoritarian regimes not so very long ago. And of course, the eastern-European countries are fairly young democracies in any case. They are still trying to navigate the liberal western world as best they can. Meanwhile, we are seeing mounting tension in Europe between West and East in addition to the earlier tension between North and South. Of course, Europe’s borders are restive and there is huge pressure on the trans-Atlantic relationship.
As the West is being put upon, we see that the upcoming are taking a harder stance as they exploit any opportunity to play the western countries against each other. The West should also beware of possible alliances between parties that were seen as incompatible before. Significantly, Xi Jinping and Vladimir Putin have met 26 times since 2013.
War on many fronts
Such developments are sowing the seeds for further weakening of the growth potential. The biggest fears so far have focused on the implications of a trade war but a combination of trade conflicts, geopolitical brinkmanship and muscle flexing, alongside the weaponising of global finance, is the largest threat.
Trump is not afraid to deploy trade and financial weapons and his opponents are little-inclined to bite the dust either. Considering the size of the US economy and bond market, as well as the power of the dollar, the most likely outcome is that America’s adversaries will eventually throw in the towel. However, by then a lot of damage may already have been inflicted.
The essential rate of potential growth will not rise on the back of the current (and expected) international political developments. Western countries will increasingly be hampered by ageing populations and high debt mountains. Emerging economies with high debts in foreign currency will also find it increasingly hard to overcome these debts through higher economic growth, whereas their populations are becoming ever-more demanding. On top of this, there is a growing chance of further political instability as more democracies move towards the twilight zone between democracy and autocracy.
We still think the crisis is unlikely to turn into a bloodbath that will engulf many other emerging economies. However, the global bear market that our economists fear has certainly come closer.