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“Slowbalization” of the World Economy

Dear Readers,

As we enter the last week of June 2020 and get ourselves ready to start the second half of 2020, it’s a moment to pause and reflect. We entered 2020 on a note of slowing globalization in the backdrop of U.S- China trade war and a host of anti tariff measures between U.S and several countries. No one had anticipated what would follow next. If trade war had started the pain on the World Economy, Pandemic worsened the pain like never before. This has been validated by the International Monetary Fund (IMF).

The International Monetary Fund (IMF) released its World Economic Outlook report June 2020 report and needless to say the outlook forecasted by the International group has been very gloomy. The World economy is projected to have a contraction of -4.9% in 2020. This is more severe than the earlier projection of -3% done by the group in April 2020 during the initial weeks of the Pandemic. The growth in U.S and Euro area has been projected to contract by 8% and 10% respectively. According to IMF the Pandemic has turned out to be worst than predicted particularly in big emerging countries such as Brazil and India. The two giants are expected to contract by 9% and 4.5% respectively.

GDP growth rate

Source: IMF Data published in World Economic Outlook June 2020

The above report also sites data from International Labour Organization (ILO) to report a loss of work hours in 2020 Q1 compared to 2019 Q4 equivalent of 130 Million full time jobs. The report also forecasts working hours loss equivalent of 300 Million full time jobs in 2020Q2. The low income skill set groups have been particularly hit as I highlighted earlier in my blog on impacts of COVID-19 on Emerging Markets.

Is the Pandemic the only reason for the world growth to slowdown? It is the reason for the slowdown in 2020 but what about earlier years. The World Bank data from past years show the World GDP to be around 2.5% to 3.5% for the last decade.

World GDP growth rate

Source: World Bank

The world growth seems to have got into a “Secular Stagnation” mode. There have been trillions of dollars spent on infrastructure around the world to boost growth. The emerging economies do clock higher growth rates but not enough to pull the world growth rate above 5%.

There could be many reasons for the underperformance of a particular country or a region but if we take the World as one entity and try to find the reasons for the “Slowbalization” few things come into mind.

  1. Inequality : I finished a conference call with my team on a Friday evening on the 26th of June and one of the things that came up for discussion was disparity in income levels in U.S. A team member mentioned about Atherton county and Redwood city in California, literally next to each other but having Day and Night difference in living standards. The average house in Atherton is upwards of $15Million whereas in Redwood city there are peoples who struggle to meet daily needs. I am sure such examples do exist around the world. According to The Guardian newspaper based on Credit Suisse report nearly 50% of the world’s wealth is owned or controlled by 1% of the population. The report also mentions 3.5 billion people to have less than $10,000 of assets. The world cannot achieve high growth rate when billions of people do not have access to somewhere near same level of opportunities as the privileged class. It would be foolish to expect 1% of world population to perform miracles year after year and pull the world growth to a higher trajectory.
  2. Inefficiency : The impediments to a fair global trade such as tariffs, travel restrictions and unfair trade practices are largely responsible for a sluggish growth in world trade. According to IMF data published in June 2020, the World is set to experience a contraction of 11.9% in trade in 2020. The advanced economies would contract by 13.4% and the emerging countries would contract by 9.4%.
World Trade Output

Source: IMF Data published in World Economic Outlook June 2020

In recent years many countries imposed tariffs on goods imported from other countries in the pretext of developing domestic business but in reality they were creating more inefficiencies in the system. For example in India the Government doesn’t allow foreign direct investment in retail because the powerful trade union which is a major voting bloc opposes it. This has led to several inefficiencies in the supply chain process and the end consumer also doesn’t get the best product always. It’s important that poorer countries become net exporter of goods to the world market.

3. Geopolitics: There is no better example than the politics which happen all the time when it comes to Oil trading. The Organization of the Petroleum Exporting Countries (OPEC) which mainly has countries in the Middle East and North Africa as its members gets embroiled in Middle East politics between countries led by Saudi Arabia on one side and countries supported by Iran on another. The cold war era rivalry between two other big players in the Oil market U.S and Russia is well know to all. The recent slump in oil prices was largely due to Saudi Arabia and Russia refusing a production cut in-spite of a Pandemic reducing the World demand for Oil. The slump in oil prices have a direct impact on the GDP of Middle East Countries, Russia and several other nations. In below chart I have shown the GDP trend across three countries from three different regions and have compared it with the Oil price change (Average of the price of Brent, WTI and Dubai Fateh).All the three countries show a drop in GDP with the drop in Oil prices.

GDP rate verses Oil Price change

Source: IMF Data published in World Economic Outlook June 2020

4. Demographics: According to IMF report on Population 2020, the world has added 1 billion people every one to two decades since 1960. The United Nations projects the population to cross 9 billions by 2037. Although the fall in fertility rate has happened across all regions, the developed world particularly Europe (1.6) has seen the sharpest drop whereas Africa and South Asia continue to have population boom. India is expected to become the most populous nation before 2030 and Nigeria could become the third most populous nation replacing U.S.

Population Trend

Source: IMF report on Population

According to the United Nations 84% of the World’s population today live in less developed countries up from 68% in 1950. This share would continue to grow which has serious implications for World Economy.

According to Pewresearch data by 2100 there would be 5 African countries in the top ten most populous countries.

World’s Top Ten Populous Nation

The economic growth rate in the developed world has fallen due to decreasing labour force participation whereas the developing world is having surplus man power but not many jobs to make the best use of the younger population.It would be difficult to sustain the new population addition in the poorer countries unless there is economic development in those countries.

5. Corruption: Although corruption has been around since time immemorial, its effect on the economic development is beginning to make headlines in last few decades. Among the most common causes of corruption are the political and economic environment prevailing in the country, societal rules and behavior etc. Corruption impedes economic growth and affects business operations, employment and investments. It also lowers tax collections and the effectiveness of various pro poor programs. The wider society is affected in their daily lives when they are forced to pay bribes to civil servants for getting their works done. In several corrupt countries The Governments have little interest in educating the masses and lifting them out of poverty. They would rather continue to rule an uneducated mass easily swayed by their ideas.

According to Corruption Perception Index data published by Transparency International “corruption is more pervasive in countries where big money can flow freely into electoral campaigns and where governments listen only to the voices of wealthy or well-connected individuals”. “The index ranks 180 countries and territories by their perceived levels of public sector corruption, according to experts and business people. It uses a scale of zero to 100, where zero is highly corrupt and 100 is very clean. More than two-thirds of countries score below 50 on this year’s CPI, with an average score of just 43. Similar to previous years, the data shows that despite some progress, a majority of countries are still failing to tackle public sector corruption effectively”.

The results of the 2019 report are as follows:

  • The top countries in the list are New Zealand and Denmark, with scores of 87 each, followed by Finland (86), Singapore (85), Sweden (85) and Switzerland (85).
  • The bottom countries in the list are Somalia, South Sudan and Syria with scores of 9, 12 and 13, respectively. These countries are closely followed by Yemen (15), Venezuela (16), Sudan (16), Equatorial Guinea (16) and Afghanistan (16).
  • Western Europe and the EU is the highest scoring region with an average of 66/100, while Sub-Saharan Africa is the lowest scoring region with 32 points. Both regions have kept an unchanged average since last year.
  • The report highlights the relationship between politics, money and corruption. It underscores the importance of keeping big money out of politics to ensure political decision-making serves the public interest and curbs opportunities for corrupt deals. Countries that perform well on the CPI have strong enforcement of campaign finance regulations.

According to research data published in 2007 analyzing data from 1999–2004, a strong correlation exists between higher CPI and higher long-term economic growth with 1.7% growth in GDP for every unit increase in CPI.

After identifying the plausible causes for the slowness of the global growth I would like to draw the attention of the readers to the feasible recommendations:

Recommendations:

  1. Improve process of political funding of parties and remove lobby groups.
  2. Public servants should be held accountable for implementation of pro poor schemes.
  3. Unnecessary regulations should be removed and interference of Government should be minimized.
  4. Ensure speedy trial of corruption related cases to instill confidence in the mind of the ordinary people.
  5. Empower citizens by investing in quality education and healthcare especially in poor and developing nations.
  6. Multilateral world institutions such as WTO, IMF, World Bank etc should nudge nations to remove barriers to trade and incorporate fair trading practices.
  7. Reform of World Institutions to improve participation of poor and developing nations.
  8. The wealth and income disparity needs to be lowered by ensuring access to opportunity for all. Fiscal measures should be taken to improve tax collection especially among the super rich.
  9. Skilled migration should be encouraged to bring young talent to the developed market where the labour force is decreasing.
  10. Access to technology should be made a fundamental right for citizens. This will ensure quality and fast information to the people. It will also help in reducing time frame and improve operational efficiency.

These steps may not be the only ones to improve global growth but definitely can be a good starting point.

Stay Healthy and Stay Safe !

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