The geopolitical and economic tumult unleashed by Donald Trump has awakened us to the importance of political and economic stability. While their presence is rarely acknowledged, their absence becomes immediately evident. They are the invisible hand that guides development, progress, and prosperity.
In this context, two articles in FT provide some food for thought.
Bronwen Maddox has a very good article in FT which argues that defence is the greatest public benefit for all.
“For 30 years, we have been taking money out of defence budgets and putting it into health and welfare,” one senior European minister told me. “Now, we will have to reverse that.” The point has been made by generations of US politicians and military leaders even before Donald Trump made the “freeloader” charge his own: Europe has relied for its defence on the US, making itself the continent of the proud welfare state. Ursula von der Leyen, head of the European Commission, acknowledged that earlier this year in her analysis of Europe’s competitiveness problems: that the continent had enjoyed years of cheap gas from Russia, in effect cheap labour from China through imports, and cheap defence from the US. Now it needed to compete without them. Easier said than done. Benefits, pensions and healthcare are popular with voters. Defence, not so much… politicians will have to persuade voters to surrender some of their benefits to pay for defence, perhaps the essential public benefit above all, even if it has been taken for granted for decades.
Robin Harding draws attention to Charles Kindleberger who, in the context of the Great Depression, highlighted the importance of a global hegemon or stabiliser.
The world economy, he argued, needs a hegemon: a leader willing to incur some cost and risk for the sake of the whole. “For the world economy to be stabilised,” he wrote, “there has to be a stabiliser, one stabiliser.”… Without an economic hegemon in the 1930s, wrote Kindleberger, there was nobody to provide three crucial functions: to maintain a relatively open market where countries in distress could sell their goods; to provide long-term loans to countries in trouble; or to act as a global central bank, and offer short-term credit against collateral in times of crisis. The result was protectionism, currency devaluations, wrangling over war debts and contagious financial crises that swept from one centre to the next…
Kindleberger published his book, The World in Depression, in 1973 and ended it with a few words on “relevance to the 1970s”… The “relevance to the 2020s” of Kindleberger’s book is greater and gloomier. We have two competing superpowers, the US and China. Both fancy themselves as hegemons; neither is willing to accept the responsibilities of the role. The US vows vengeance on anybody who threatens the primacy of the dollar even as its own actions put that primacy in doubt. China rails against its lack of status in the current economic system, even as it plays a prime role in destabilising it.
Since the War, and especially since the fall of the Berlin Wall, the US, as a global hegemon, intervened to contain civil wars and geopolitical tensions, became the buyer of last resort, absorber of excess liquidity and surpluses, provided a haven for investors, and shaped and maintained a global political and economic order.
Trump’s actions have shaken the comforting political and economic consensus that underpinned the post-war order, which was reinforced by the collapse of the Soviet Union. The emergence of China appeared to have further reinforced the consensus in both political and economic realms. Democracy, free speech, free markets, trade, capital flows, technological collaborations, migration, and mutual defence commitments bound the Western countries together through a series of interlocking multilateral treaties, alliances, and agreements. There was a global order shaped by the US leadership that had become entrenched over the last seventy years.
It survived several challenges over the years, including President Trump’s first term. The impressive resolve shown by the Western allies in quickly rallying together to respond to Russia’s invasion of Ukraine was only the latest demonstration of the strength of this alliance and the global order created by it.
In fact, the high noon of this post-war consensus may have been the period from 1991 to 2015. The period between the collapse of the Soviet Union and the arrival of Xi Jinping’s China no longer willing to hide its strength and bide its time coincided with remarkable geopolitical stability and the Great Moderation economically.
The biggest beneficiaries of global political and economic stability, underpinned by the US-built global order, are perhaps the East Asian economies, China, and India. These countries have been among the biggest beneficiaries of globalisation and unbundling of supply chains, trade liberalisation, cross-border capital flows, immigration to Western countries, access to US colleges, diffusion of technologies developed in the West, benign global macroeconomic conditions, resolution of regional disputes and containment of regional wars, and so on. Among them all, China has been the stand-out beneficiary.
The resolution and localisation of conflicts, especially in Africa and the Middle East, were central to securing and assuring access to mineral resources critical to sustaining economic growth. Global oil and gas supplies were underwritten by the US. As also the security of global shipping routes, whose importance has been rudely reminded by the Houthi rebel attacks in the Red Sea area. It has allowed these countries to focus on development, economic investments, and the welfare of their citizens while allowing defence spending to decline as a share of the GDP. It provided them with certainty and stability that were critical to the long period of unprecedented global economic growth.
On the same lines, the global response to all the major post-war economic crises has been coordinated by the US. They include the Latin American debt crises of 1980s, recurrent debt waivers and restructuring of low-income countries, the East Asian financial crisis of 1997, the global financial crisis of 2008-09, the pandemic response of 2020-21, all of which stabilised the global economy and backstopped contagion and economic depression.
Closer home, India has benefited greatly from the post-war global order, especially in the last three decades. The two widely cited and proudly proclaimed achievements of post-independence India, its software industry and the hugely successful Indian diaspora in the US and Europe, owe their success almost completely to this consensus.
While it is difficult to quantify the contribution of political and economic stability, it’s useful to think about a counterfactual world without these trends and institutions that are maintained by the prevailing global order. It’s hard to not believe that these countries could not have developed and prospered in the manner that they have done.
Unfortunately, this counterfactual world now appears a reality in the face of the actions of the Trump administration.
I can think of three reasons for the support or at least approval of the Trump administration’s actions. The first explanation revolves around the conservative pushback at the swing towards excessive liberalism, manifest in the rise of woke attitudes and trends. The second is the blend of libertarianism and techno-optimism, coupled with the belief in some innate superiority of the private sector and that the government is incompetent, is impeding technological progress, and there should be large-scale deregulation. The third is the opportunistic belief that Trump’s political leanings make him more likely to contain China (belief in India), be tolerant to autocracies and willing to strike value-free “deals” (belief in the Middle East and Russia) etc.
I confess to being sympathetic to the first and third explanations.
But as Janan Ganesh has written in FT, it may be that we are not only past peak-woke but perhaps past even the peak of the anti-woke movement. The second is in keeping with the times of AI exuberance and the swing to deregulation is the latest fashion in macroeconomic policymaking. The third is more about parochial hope in a hostile world.
It’s fair to argue that only someone like Trump could have reversed certain trends and practices that had gone overboard - erosion of conservative values, trade liberalisation, immigration, dependence on Chinese manufacturing etc. The woke capture of liberalism is loosening. On trade liberalisation, immigration, and China, Trump has succeeded in rebalancing and forging a new consensus within the US and Europe. These are all welcome developments.
Shifts like Apple’s pivot to India have been hastened by Donald Trump. Climate transition and the abandonment of legacy energy sources had become too ideological and disconnected from its real costs, especially for developing countries. This needed rebalancing, though not to the extent that is now happening in the US. International development had become a cosy club of disconnected cosmopolitans and needed a shake-up, though not abruptly and destructively as is now happening with USAID.
But all this is coming at a prohibitive cost to the two important public goods that underpinned sustained development, economic growth, and progress. Political and economic stability are the biggest casualties of the Trump administration.
Besides, it does little to address the main problems that have been contributing to the gradually eroding social and political contract. This erosion manifests in the form of widening inequality, rising business concentration, and elite capture of the rule-making processes and institutions. Worse still, the Trump administration may end up reinforcing and turbocharging the dynamic of this erosion. The economic policies of the Trump administration appear most likely to benefit Big Tech and Wall Street but at the cost of Main Street. Capital at the cost of labour. Profits and efficiency maximisation at the cost of equity and resilience.
But for how long? Is it the climax of the high noon of individualism, capitalism, and efficiency maximisation?
Perhaps the long period of excessive stability instilled a sense of complacency and sowed the seeds for the current tumult. This anti-thesis to the post-war liberal democratic capitalist thesis may be an essential requirement to develop a new synthesis.
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