TRUMP’S victory FUELLED BY ECONOMIC WOES
27 Nov 2016 4:01 PM GMT
The winning of Trump as the US President has been the talking point in international media. His win proved that at times how popular perceptions can go wrong. However, if one were to look into economic factors leading to his win, the result was all but certain.
Trump won because his protectionist strategies were more convincing for the average American. Data suggest that there are four headwinds: demographics, education, debt and inequality, which are hitting the US economy. Trump won as he took advantage of these factors.
Consider demography. An elderly population means a fall in productivity and real income. The high growth of the US economy during the 1970s and 80s was because of a younger working-age population and women entering the labour force. But now, with the retirement of baby boomers and a smaller number of working-age population, US productivity has waned.
The elderly population need protection in terms of greater social security, specifically lower medical costs. Trump promised to repeal and replace Obamacare, which to him has raised healthcare costs.
The costs of US college education are higher and there are many dropouts. The college completion rate in the US is around 15 percentage points lower than its neighbour Canada.
Higher costs of education (which is also higher than the medical costs) have been reasons for many young Americans to quit education in between, with a negative impact on productivity. This is also responsible for an increase in income inequality.
In the US, the growth rate for the bottom 99% of the income distribution is growing slower than the national average. It was easier to convince unemployed Americans that their jobs are taken by the outsiders and it is time to bring those jobs back.
This idea of creating jobs has gained prominence as technological innovations are no longer inclusive. The innovations that happened during the last 150 years were inclusive and these have benefited Americans. Consider this. In travel, the economy graduated from a horse-driven buggy to a Boeing.
Electricity and ownership of motor vehicles increased from zero to near 100%. In computing power, present day mobile phone handsets have more computing power than the computer that launched a rocket to the moon.
It is projected that within next ten years, the computing power of mobile phones will be more than that of humans. All this was instrumental in improving productivity and real income growth in the US, in a way that no one has ever imagined before. But no longer.
In this age of data algorithms and start-ups, wealth is getting cornered in hands of the select few. And this has called for a more active welfare state. Federal government debt is growing very rapidly: from $5 trillion in 2001 (47% of GDP) to around $20 trillion (111% of GDP) at present.
The welfare objective is driving this deficit with an increased amount of funds being allocated towards social security (pensions and unemployment benefit) and healthcare programmes. On the contrary, the federal budget allocated for non-transfer payments type spending (primarily geared towards productive investments) are down from 11.5% of GDP in 1966 to 6.5% in 2016.
As productivity is not improving, the US government has no other options but to actively indulge in the distribution of assets, favouring the poor. Monetary policy – either through quantitative easing and/or lowering interest rates – has not been that effective. Policymakers are now venturing for fiscal stimuli such as printing money and transferring them directly into the hands of the poor in an attempt to reduce income inequality.
The problem with such an approach is that it is a short-term fix. In a longer time horizon, without inclusive innovation, rising fiscal deficit cannot be sustained. Lack of productivity and jobless growth are driving many economies across the world to turn protectionist. Trump gained by openly criticising NAFTA and the Trans-Pacific Partnership. His business acumen told him what to do given what has happened in terms of Brexit and rise of ultra-right wing in Europe.
In fact, an important paradigm shift is underway. Over the course of last century, global trade has been growing faster than global GDP. However, post-2008, this trend is reversing. Presently, world trade is growing more slowly than world GDP, and this has happened for the third year in a row.
Recent estimates by OECD in 2015 indicate trade figures for the G-7 group of countries fell by 7.1% while trade figures for major emerging economies including Brazil, China, India, Indonesia, Russia, and South Africa slumped by 9.5%.
Global trade is slowing down primarily because of lack of productivity growth in the US and in Europe. These two regions account for more than half of world trade volumes, and a slowdown in these regions will naturally have an impact on global trade. With an economic slowdown there will be a concomitant fall in investment across national boundaries, which means lower trade.
Three is a slower intra-industry trade, particularly in those associated with the international fragmentation of production. A fall in investment flow negatively affects trade in commodities such as cars, computers, air conditioners and refrigerators. In event of slower trade growth, individual countries turn protectionist.
Protectionism is becoming evident in terms of an increase in applied tariffs (although keeping them below the rates countries bound at WTO) and non-tariff barriers, mainly in the form of anti-dumping measures, sanitary and phytosanitary sanctions, and even through the provisions granting subsidies to domestic producers.
We are jinxed: protectionism is leading to slower trade which in turn is leading to slower growth. Slower growth is making people despair and dividing society, something that Trump has exploited well during his campaign.
India uncertain about Trump’s reign
The incoming Trump administration in the United States ‘will have different priorities’, there may be a ‘degree of decoupling’ with Europe and fluidity at the great-power level may translate into ‘uncertainty at the regional level’ - which would make it imperative for India “to engage with a multiplicity of actors in a multi-polar world”, Foreign Secretary S. Jaishankar said.
“There will be change in terms of engagement of the US with the world,” Jaishankar said in his keynote speech at a seminar on ‘India and the Great Powers: Continuity and Change’ at the Institute of Defence Studies and Analyses (IDSA).
“What can be safely predicted is that the Trump administration will have different priorities,” he stated. He also posed the question as to whether the upcoming Trump administration would bilateralise most of the US’ ties with other parts of the world.
The Foreign Secretary said that “fluidity at the great power level was translating into uncertainty at regional level”. He was of the view that how India positioned itself optimally in its engagement with the US, Europe, China and Russia would be a challenge.
“In an evolving global order, India needs to engage with a multiplicity of actors in a multi-polar world,” Jaishankar said. Stating that India was not a beneficiary of the post-1945 world order, he said that forums like BRICS (Brazil, Russia, India, South Africa) offered New Delhi opportunities to engage with powers like Moscow and Beijing.
As for the involvement of ‘great powers’ in India-Pakistan relations, he said that “the lesson we have learnt is that it has not been helpful”. Regarding Pakistan’s posturing of using tactical nuclear weapons, he said, “We don’t speak of tactical nuclear weapons. Somebody else does that.
The tactical nuclear weapons developed by Pakistan would be devolved to lower ranking officers at the battlefield level, who will be “younger officers in an army that is increasingly religiously motivated and less and less professional and that has consistently produced rogue officers and staged coups against its own leaders”.
This, according to him, means that the likelihood of such tactical nuclear weapons being used against India has increased. Tactical nuclear weapons are nuclear weapons which are designed to be used on a battlefield in military situations.
In his speech, Jaishankar also talked about regional unity and said that if there was any country that has more interest in the South Asian Association for Regional Cooperation (Saarc), it was India. Following the cross-border terror attack on an army camp at Uri in Jammu and Kashmir in September that claimed the lives of 19 Indian soldiers, India decided not to participate in the Saarc summit that was scheduled to be held in Islamabad earlier this month. Afghanistan, Bangladesh and Bhutan too followed suit resulting in the meet being called off.
Jaishankar said that if anything bad happened in South Asia, it impacted India the most as it was the biggest country in the region.
Without mentioning Pakistan, he said that the approach of not allowing regional trade and connectivity has to change. On China’s One-Belt-One-Road initiative, he said that India was open to be a part of any regional connectivity issue if it was consultative in nature. He said for India to become a great power, it needed to develop a broader identity.
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