I gave the speech below at a central bank conference on 24th November in Asia.
De-globalisation is not the dominant theme
De-globalisation is the word of the year thanks to the victories of the Brexit vote camp and Donald Trump. It is a convenient catch-all term, but I think it can obscure more than it reveals. For example, it does capture the campaign messages of many elections in the West, yet it fails to capture the mood in Asia. Countries like China, India and Japan are still eager to participate in free trade agreements, but have still experienced a shift away from its earlier political order. I think rather than de-globalisation, the more appropriate narrative is re-establishing trust in government. This provides a better way of preparing for investing in 2017 and beyond. Let me explain.
Anti-corruption messages win
Candidates and parties that have run on anti-corruption or anti-elite platforms have generally performed extremely well in all regions, whether it was Donald Trump in the US, the Brexit vote camp in the UK, Five Star in Italy, Xi Jinping in China or Jokowi in Indonesia. Some of these movements contained people that are part of the political establishment like Xi Jinping, while others were not like Mr Trump. But their messages have been the same. Take President Xi, his central message was that government officials had become corrupt and he was going to centralise his power to clampdown on this. At the same time, he expanded China’s global footprint. Throughout this, his position appears to have solidified.
2008 financial crisis – beginning of the end of old order
What’s behind this shift? I think its roots lie in two developments that happened around the same time. The first and most obvious was the 2008 global financial crisis. This set off a chain reaction starting with the banking industry and currently engulfing the political establishment of the public not trusting the political system. The crisis was associated with the possibility of losing your money in banks, losing much of your pension and even losing your house. This was surely the fastest way to lose trust in bankers. Later governments bailed out these banks with seemingly no penalty to bankers, but a large cost to taxpayers. They imposed savage cuts to welfare programmes and did nothing in the face of growing income inequality. Thus established political parties and the associated technocrats saw trust in them erode.
Social media disrupts the establishment
The second development was the creation of social media. We have to remember that public access to Facebook and Twitter only started in 2006 and the original Apple I-Phone was launched in 2007. So the beginning of social media roughly coincided with the 2008 financial crisis. We should not underestimate the impact of social media on politics. It has provided a mechanism for political views to be shared across large numbers of people. It has also been outside the established mediums of political discourse: the mainstream media, political parties and companies.
New mass movements
The beauty of social media is that it draws in people that would otherwise be reluctant to participate in politics. In the past, one would need to take time out to attend political activist meetings, now one can participate with a click of the button. Then by people sharing their support for ideas on social media platforms, other people would feel emboldened to become political as well. Of course, most social media political movements fail, and the successful ones often run into the problem of a lack of leadership once they “win” – the Arab Spring is a notable case here. But sometimes they stick and result in enduring changes whether in the creation of new parties such as Podemos in Spain and Five Star in Italy or the takeover of existing political parties like Donald Trump and Jeremy Corbyn in the UK. Either way, the result is an unpredictable and chaotic new force in the political system [1].
Trust in a time of chaos
The combination of the 2008 financial crisis and the rise of social media is therefore a strong force for upending the traditional forces of politics around the world. In the ensuing chaos, politicians and parties that are trusted and rail against the old order do well. It is notable that many of the politicians that have thrived are ones that were former successful mayors or governors of provinces (Boris Johnson was mayor of London, Jokowi was governor of Jakarta and mayor of Surakarta, Modi was Chief Minister of Gujrat). Mayors have typically been much more popular than national leaders. Others such as Obama or the Five Star Movement or Jeremy Corbyn have been extremely effective in building grass-roots support through social media. Yet others like Donald Trump have spent years on reality shows, where viewers can feel they know the real person.
Trump accepts globalised world
The main message here is that political systems around the world are being pressured not by de-globalisation, but rather by a lack of credibility. Even Donald Trump, who on the surface appears to be anti-globalisation, is embracing parts of globalisation by proposing the US should have the lowest corporate tax rate in the developed world to attract corporations to the US. And since his election he has barely mentioned China, which suggests that a trade war is not in the offing. Indeed, we need to remember that President Obama has already imposed tariffs on Chinese steel imports, which has resulted in China responding by imposing tariffs on US exports of caprolactam, a material used in textiles. So Mr Trump may simply extend a Democrat policy.
China to step into the breach
The more meaningful consequence of Trump’s stance on trade is that it may allow China to play a larger role in global trade, especially in Asia. For example, the proposal to withdraw from the Trans-Pacific Partnership (TPP) agreement would naturally be supportive of China’s trade aspirations as China is not part of TPP. Therefore, the demise of TPP provides China with the opportunity to establish its own multilateral free trade agreements in its absence.
Trump 2017 fiscal stimulus = Obama 2009 fiscal stimulus
Mr Trump’s much vaunted infrastructure spending programme and cut in taxes at its heart is a fiscal stimulus programme. It was something Barack Obama did at the beginning of his administration, when the Democrats also controlled Congress. Ironically, for all the talk of being anti-elite, using fiscal policy rather than monetary policy to stimulate the economy appears to be the growing consensus amongst academics.
China is the big story in 2017
What we should not forget though that China has its 19th National Congress of the Communist Party in autumn next year. Held every five years, the Congress elects the new leadership of the Communist Party, which includes the key appointments of the General Secretary and members of the Politburo Standing Committee. We think there is little doubt that Xi Jinping will remain General Secretary, but there is more uncertainty on the Standing Committee composition. Xi Jinping’s attempts to end party factionalism have been disruptive. President Xi may therefore introduce a large fiscal stimulus programme early next year to buttress his support. Ironically, China’s, rather than the US’s, fiscal stimulus may end up being the bigger story next year.
Euro area elections more stable?
Finally, the more immediate political events of note are in the euro area. On 4 December, there is the Italian referendum on political reform, and then next year there are the Dutch, French and German elections. All of these events could upset the status quo within Europe. While it is tempting to see all of these events as Brexit or Trump like, the nature of the euro area political systems is such that those types of outcomes are less likely.
Size of “no” vote in Italy matters
For example, in the Italian referendum – we think a “no” vote will also certainly see Prime Minister Renzi resign his post, but there is nothing that says that a general election has to be called. Instead, the governing coalition would simply pick another leader. The risk scenario is a very large “no” vote. This could force the coalition to call an early election. Currently, the Five Star party is polling strongly and this could see it win an election and thereby set a collision course between Italy and the EU.
French elections work against Le Pen
As for the French elections, the first round of elections would see all candidates up against each other, and the Marine Le Pen of the far-right anti-EU party, the National Front, is expected to win. However, the second round would only see her and the second place candidate remain. The likely scenario there is that all the votes that earlier went to other candidates would likely go to the Republican candidate, Fillon. Finally, Angela Merkel has announced her intention to run in the German elections. While some of the anti-EU parties such as the AfD could win seats in parliament, we think they will struggle to dislodge Angela Merkel as Chancellor.
Euro area to struggle
Therefore, European risks are present, but we need to cautious in extrapolating this year’s surprise results to all elections. That does not mean we have no uncertainty. An obvious one is what policies will the “established” parties take in order to win elections? Will they make promises that later come back to fracture the EU and so on? Given this, we need to be wary of the prospects for the Euro area.
Cannot ignore politics
In this speech, I have intentionally emphasised politics more than economics. We are in a transition point in political systems and beliefs as the combination of the 2008 financial crisis and the rise of social media combine to create more chaotic outcomes. Understanding the interplay of the new politics and markets will be our challenge over the coming years.
Bilal
[1] An excellent new book on this phenomenon is “Political Turbulence: How Social Media Shape Collective Action” by Margetts et al. The evidence-based book outlines the emergence of “chaotic” pluralism thanks to social media.
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