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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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    Economy set to grow despite external threats, says Ibec

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    Strong economic growth is forecast for this year and next despite external threats such as Brexit. But there is no room for complacency, Ibec has said.

    Publishing its latest economic outlook, the business group projected GDP growth of 5.7 per cent for 2018 and 4.3 per cent for next year. It also said it expects consumer spending will rise by 2.9 per cent in volume terms this year and by 3.1 per cent in 2019.

    “The economy is growing, trade remains robust despite Brexit, and households are clearly benefitting through incomes which are increasing at the fastest rate in Europe,” said Gerard Brady, Ibec’s head of tax and fiscal policy.

    He said the Irish economy had firmly moved into a ‘post-recovery’ stage with both employment and consumption comfortably passing their pre-crisis peaks.

    “With the economy approaching full employment the biggest challenge facing the Irish labour market will be finding workers to fill vacancies. Feedback from Ibec member companies suggests that firms are now finding it increasingly difficult to attract and retain talent.”

    Complacency

    While the latest report is generally upbeat, Ibec warned against complacency on competitiveness at a time when external threats could impact on growth.

    “As the economy comes close to capacity and navigates significant challenges to our external environment over the coming years it is important we make the right decisions to protect our indigenous industry,” said Mr Brady.

    Ibec urged the Government to adopt a renewed focus on competitiveness in Budget 2019. It also called for more investment in infrastructure, education and innovation as a means to protect the economy from any future downturn.

    Separately, a new study shows that despite 70 per cent of businesses in the Republic expecting Brexit to have a negative economic impact, just six per cent have a plan in place to deal with it.

    The situation is worse in the North where just 5 per cent of companies have formalised a strategy to deal with the consequence of Britain leaving the European Union, the latest AIB Brexit sentiment survey shows.

    Not surprising, industries that are most likely to be affected by Brexit, such as the food and drink, tourism and transport sectors, are more likely to have a plan, as are larger companies.

    While businesses north and south have been slow to put strategies in place, many have rethought investment decisions with 22 per cent of companies in the Republic having either postponed or cancelled expansion plans, a figure that jumps to 49 per cent for businesses in the north.

    Hard border

    With fears of a no deal growing, 32 per cent of companies in the State now expecting a hard border, versus 15 per cent of businesses in Northern Ireland.

    The latest survey comes as the Daily Telegraph reported that Britain will recognise some EU regulations in the event of a no-deal Brexit to ensure continued access to medicines, car parts and chemicals.

    EU exit talks restart between Dominic Raab, secretary of state for exiting the European Union, and Michel Barnier, the EU’s chief negotiator, in Brussels this week. Mr Raab is also due to give a speech on Thursday, outlining the British government’s plans for a no-deal.

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    Economy

    Turkish lira crisis poses additional risk to German economy: finance ministry

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    BERLIN (Reuters) – Turkey’s currency crisis poses an additional risk to Germany’s economy on top of trade frictions with the United States and the possibility of Britain leaving the European Union without a deal, the German finance ministry said on Monday.

    FILE PHOTO: A 100 Turkish lira banknote is seen on top of 50 Turkish lira banknotes in this picture illustration in Istanbul, Turkey August 14, 2018. REUTERS/Murad Sezer/File Photo

    The Turkish lira has lost nearly 40 percent of its value against the dollar this year, hit by a worsening diplomatic rift with the United States and by investor alarm about President Tayyip Erdogan’s influence over monetary policy.

    Germany is the second biggest foreign investor in Turkey, whose biggest trading partner is the European Union.

    “Risks remain particularly with regards to uncertainty over how Brexit is going to pan out as well as future U.S. trade policies,” the ministry said in its monthly report. “The persistent debate about tariffs and the threat of a trade war are choking trade activity.”

    “The economic developments in Turkey present a new, external economic risk,” it added.

    Despite such risks, the German economy remains buoyant, supported by state spending, private consumption, low interest rates, a robust labor market and rising real wages, the ministry said in the report.

    Companies are also expected to raise investments as the global economy remains in good shape despite the threat of a trade war, it added.

    Reporting by Joseph Nasr; Editing by Gareth Jones

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    Newly elected Pakistani PM pledges to restore country's economy

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    Pakistan’s newly elected prime minister Imran Khan said Sunday that the country is in the worst economic condition it has seen and pledged to cut government expenditure, end corruption and repatriate public funds.

    In his first televised speech Khan, who a day earlier was sworn in as 22nd prime minister, promised reforms across all fields. “I want to see Pakistan a great country” with social services for the poor, Khan said.

    Khan pointed to the growing divide between the rich and poor and said he would adopt austerity measures to relieve the strain on the economy and tackle the country’s foreign debt, over $95-billion.

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    “The interest that we have to pay on our debt has reached a level that we have to take on more debt just to repay our obligations,” said Khan, calling on Pakistanis abroad to save their money in the country’s banks during this financial crunch.

    Khan added that his government will also reform the police, health and education sectors, referring to his party’s successes in those fields in the Khyber Pakhtunkhwa province.

    Khan spoke only briefly on foreign policy. “We will keep good relations with all countries; we want peace as without it no progress and development is possible,” he said.

    Earlier in the day, the legislature in Pakistan’s largest Punjab province elected a member of Khan’s party as chief minister following last month’s elections.

    Usman Buzdar won a majority of 186 votes out of 371 in the Punjab provincial assembly in Lahore, defeating Hamza Shahbaz Sharif, who secured 159. Sharif is the son of the previous chief minister, Shahbaz Sharif, and the nephew of former Prime Minister Nawaz Sharif, who has been jailed on corruption allegations.

    Sharif’s Pakistan Muslim League won the most seats in the Punjab assembly in last month’s elections, but Buzdar prevailed with the support of independents and allied parties.

    Khan’s Tehreek-e-Insaf is now the governing party in the National Assembly as well as the provinces of Punjab and Khyber Pakhtunkhwa.

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