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Strong-Arm Governments Are Taking Over the Global Economy

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Surveying the end of the Cold War in 1989, political scientist Francis Fukuyama famously argued in an essay titled The End of History? that Western liberal democracy was the culminating form of government. That’s not quite how things have played out. History, you might say, has returned.

Consider the Group of 20. Establishment political parties in those countries, the avatars of Western democracy, have seen their share of the G-20’s total economic output shrink in recent years. The most striking countertrend has been the rise of populism. Populist parties—claiming to defend the common man against corrupt elites, valuing national unity above cosmopolitan inclusion, and offering simplistic solutions against complex policy debate—have been gaining strength since the global financial crisis a decade ago. President Donald Trump in the U.S. is one prominent example. Italy is another. The Northern League and Five Star Movement swept into power there this year. Populists, according to our classification, now manage the largest bloc of the G-20 economies. (For additional Bloomberg Economics research on the topic, run BI ECON on the Bloomberg terminal and search for “populism.”)

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Here’s how we broke it down: Each year from 1980, we sorted the governments of the G-20 countries plus Spain into four categories—establishment democracy, populist democracy, weak democracy, and authoritarian—and tracked what portion of the G-20’s total gross domestic product they oversaw.

A couple of things emerge from this analysis. First, the populist category jumped in 2016. That reflects our decision to characterize the U.S. as “populist” after Trump’s election and to shift the world’s largest economy into the category.

Second, the rise of China means that authoritarian regimes, with strong central power and limited political freedom, play an expanded role. That’s a significant shift in how the world economy is run. So far it hasn’t had a major negative impact on growth and financial stability. Is it only a matter of time? A deeper look at the relationship of governance to growth reveals some nuance about what’s likely to be important in that regard.

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To put some numbers to it: When you add up the nominal output of the G-20 states plus Spain, their combined GDP is about $64 trillion. Populist governments now control 41 percent of that. By contrast, in 2007, before the crisis roiled the world, the figure was only 4 percent.

Mainstream democratic parties, which typically occupy the center of the political spectrum, have gone from dominance to minority. They preside over only 32 percent of the G-20 output. In 2007 they accounted for 83 percent.

Authoritarian regimes—China, Russia, Saudi Arabia, and Turkey are all classified as “not free,” according to Freedom House, a Washington-based think tank whose founders included Eleanor Roosevelt—manage 24 percent of G-20 GDP. China accounts for almost 19 percent, up from 8 percent a decade ago.

There are, of course, issues of judgment. Should the U.S. under Trump fall in the populist or mainstream democratic category? Probably somewhere in between.

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So is there another way to tease out a populist trend? One is to examine the share of popular vote garnered by the top two parties, which typically represent mainstream political sentiment. Among major democracies, that share has fallen to 63 percent from 74 percent in 2007. What that misses is the way mainstream parties—particularly the U.S. Republican Party and U.K. politicians after the Brexit vote—have adopted populist agendas to hold on to votes. Even so, the same pattern stands out: The mainstream is losing influence.

What consequences will economies face from the lurch toward populism and authoritarianism? Mainstream parties, and indeed economists, should be humble about how much they know about good policy. Failure to manage the forces that globalization unleashed created the conditions for the rise of populism in the first place.

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Even so, as traditional economic logic plays a diminished role in big policy decisions, it seems reasonable to ask if a slide toward populism and authoritarianism will erect barriers to growth. The shift is, after all, producing plenty of violations of the good-policy playbook.

Leaving aside self-interested mismanagement of the economic cycle—goosing growth for short-term political gain, for example, a practice common to both mainstream and populist governments—we’d break the missteps into two categories: First are policies that damage growth potential. Brexit, taking the U.K. out of the world’s biggest free-trade bloc and shrinking markets for the country’s goods and services, is one example.

Second are policies that undermine institutions. That includes everything from the head-spinning reversals of U.S. policy under President Trump, such as his refusal to sign the G-7 communiqué in June (adding to uncertainty), to Turkish President Recep Tayyip Erdogan’s appointment of his son-in-law to a key economic post in July (reducing accountability).

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Is it time to get out the placards saying, “The end is nigh”? Not yet. To be sure, Turkey and Italy are flirting with crisis, and the U.K. is underperforming. But looking at the G-20 as a whole, GDP growth rose to 3.8 percent in 2017, the fastest pace since 2011. In part, that’s because populists got lucky. They fed on economic discontent but ultimately inherited an upswing. Pro-cyclical policies, notably the U.S. tax cuts, are giving growth an additional boost. A pro-business stance, with a bonfire of regulations in the U.S., China, and India, is also helping.

Those factors are important. But the persistence of growth reflects something more than just luck and stimulus. Some aspects of governance, it seems, are more important for growth than others.

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The World Bank’s Worldwide Governance Indicators project has gathered data in more than 200 countries on six dimensions of governance: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. An analysis using that data shows that high-quality regulation and government effectiveness correlate more closely with growth than democratic values such as voice and accountability, which track views about citizens’ ability to participate in their government. In those terms, the trajectory on governance in the G-20 looks less alarming. Democratic standards may be deteriorating, but quality of regulation and government effectiveness remain comparatively stable, even edging up in recent years.

Will the new rulers of the world’s major economies really be able to decouple long-term growth from the institutions that underpin good governance? Count us skeptical. Cycles turn. Confidence fades. Government effectiveness and high-quality regulation are tough to maintain in the absence of policy debate and accountability for leaders. The return of history has not, so far, meant the end of growth. But we’re keeping our placards on hand … just in case.

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Orlik is chief economist at Bloomberg Economics in Washington. Jimenez is an associate economist in Hong Kong.

 

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    OBAMA: 'There's a pattern' of Republicans running the economy 'into the ground' and Democrats having to 'come back …

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    Pablo Martinez Monsivais/AP

    • Former President Barack Obama pushed back on Republicans attempts to take credit for recent economic strength during a speech Monday.
    • “So when you hear all this talk about economic miracles right now, remember who started it,” Obama said.
    • Obama also made the argument that Democrats in general are forced to “clean up” after Republicans hurt the economy.
    • “I do think it’s interesting, I just hope people notice that every time there’s a pattern where they run things into the ground and we have to come back and clean things up,” he said.
    • While a majority of recessions since 1950 began while a Republican was president, it’s hard to pin an economic downturn just on a president’s — or one party’s — policies at the time.

    Former President Barack Obama once again disputed Republicans’ attempts to take credit for the US economy’s recent strength.

    Obama, speaking at a midterm-election rally in Nevada, said Monday that President Donald Trump and the GOP should recognize just how long the current economy recovery has been going on and when the recovery began.

    “So by the time I left office, wages were rising, the uninsured rate was falling, poverty was falling, and that’s what I handed off to the next guy,” Obama said. “So when you hear all this talk about economic miracles right now, remember who started it.”

    This isn’t the first time Obama has weighed in when Trump has taken credit for the strong US economy. During a speech in September, the former president pointed out that the recent stretch of job growth numbers are roughly equal to Obama’s last few years in office.

    In essence, Obama is arguing that the recent boom is simply a continuation of the long upswing that began when he was in office.

    Republicans, by contrast, argue that policies enacted under Trump — specifically deregulatory acts and the GOP tax law — are materially improving the economy over the trend lines from the Obama era.

    Obama also zoomed out and pointed to historical trends in economic downturns as further evidence of Democrats supposed advantage on economic issues.

    “I do think it’s interesting, I just hope people notice that every time there’s a pattern where they run things into the ground and we have to come back and clean things up,” Obama told a crowd in Nevada.

    While it’s nearly impossible to pin the blame for various recessions on one president or political party, nine of the 10 official recessions did start while a Republican was in the White House (the lone exception being the 1980 recession that began under Jimmy Carter).

    It would be unfair, however, to pin the blame for recessions on newly-elected presidents. For instance, George W. Bush was inaugurated just two months before the recession triggered by the dot-com bubble burst officially began. Additionally, during many of these downturns, Congress was at least partly controlled by Democrats.

    But again, a president’s policies can contribute to a downturn, but a variety of factors — monetary policy, international events, credit growth, and a slew of other issues — help contribute to the onset of a recession.

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    China Discovers How to Boost the Economy Without Toppling It

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    [unable to retrieve full-text content]

    1. China Discovers How to Boost the Economy Without Toppling It  Bloomberg
    2. Full coverage



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    Obama: When you hear economy is improving, 'remember who started it'

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    Former President Obama on Monday urged a crowd in Las Vegas to “remember who started” the current economic boom, reminding them that the country recovered from the Great Recession during his presidency. 

    Obama echoed language from President TrumpDonald John TrumpFive takeaways from Gillum and DeSantis’s first debate GOP warns economy will tank if Dems win Gorbachev calls Trump’s withdrawal from arms treaty ‘a mistake’ MORE, who in July claimed his administration unleashed an “economic miracle” with tax cuts legislation.

    “When I walked into office 10 years ago, we were in the middle of the worst economic crisis of our lifetimes,” Obama said at a rally for Nevada Democrats.

    “By the time I left office, wages were rising, uninsurance rate was falling, poverty was falling, and that’s what I handed off to the next guy,” he said. 

    “So when you hear all this talk about economic miracles right now, remember who started it,” he said to thunderous applause and a standing ovation. 

    The former president in recent weeks has criticized Trump’s tendency to take full credit for healthy state of the U.S. economy. 

    “Six months ago, we unleashed an economic miracle by signing the biggest tax cuts and reforms … the biggest tax cuts in American history,” Trump said at an event in July.

    The Associated Press fact-checker called this statement an “exaggeration,” pointing out the economy has been expanding for the past 10 years.

    The tax cuts are also not the largest in U.S. history. 

    During the Monday rally, Obama said economic growth during his presidency could partially be attributed to his administration “making sure the wealthiest Americans, folks like me, paid their fair share of taxes.” 

    Obama has been stumping for Democrats across the country ahead of the November midterms, emerging from his year of relative silence on the Trump administration. 

    He has been vocal in his criticisms of the president since stepping back into the spotlight.

    “Unlike some, I actually try to state facts,” Obama said. “I believe in facts. I believe in a fact-based reality, fact-based politics. I don’t believe in just making stuff up. I think you should actually say to people what’s true.” 

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