International politics

For some time now it has been fashionable to refer to the creation of a new multipolar world order in recognition of the growing global influence of China (and Asia more generally) as a result of its increasing economic power. Furthermore, we are now faced with the prospective rehabilitation of Putin’s Russia and his/its status in the world, although it is incomprehensible why an emerging-market country that is not even in the top 10 in terms of its share (dominated by oil and gas) of global GDP, ranking behind inter alia India, Brazil and South Korea, should be allowed a dominant place on the global stage. A much stronger case can be made for India to play an increasingly important role in the future world order.

The flip side of the coin is of course the decline (and even active withdrawal) of the West and the lessening of its influence, which has only begun and probably still has a long way to go. The three bastions of Western power and influence (the USA, Europe and the UK) are all retreating for different reasons: the US is turning inward by choice, Europe is struggling to survive as a cohesive unit, and the UK has opted to diminish its standing in the world (although still clinging to grand illusions of its influence and power).

It has been declared that the days of promoting “regime change” (e.g. as in Iraq and Libya) are over, which is just as well given the unstable political vacuums created by past campaigns. The West’s promotion of liberal democratic values using its soft power is seemingly also being discarded in favour of the acceptance of other countries’ free choice of political systems ̶ a typical postmodern view, although rather late in coming.

The result is the decline of global institutions (also in the economic sphere) that were designed, created and sustained primarily by the West, especially in the post-World War II period, based on Western values and principles. How global institutions will evolve in future remains uncertain, and whether we will indeed progress towards a harmonious multipolar world order only time will tell. Some people are looking for a new global hegemon to replace the USA, with China appearing to be the only potentially viable candidate. Whether China is qualified for such a role is a moot point, as are its aspirations in assuming such a role.

Global political economy

It is tempting to conclude that the era of neoliberalism with its preference for free markets and the limitation of the role of government came to an end with the international financial crisis in 2007/08. After all, to many people the crisis demonstrated the failings of free-market economics, with the deregulation of the financial sector that started in the 1980s generally regarded as one of the chief causes of the near collapse of the financial system in the West. Addressing the crisis and stabilising the financial system required government intervention on an unprecedented scale and was followed by a broad-based tightening of regulation, in particular in the banking sector.

However, the answer is not that simple. There is a strong body of thought in support of the view that reforming the banking sector did not go far enough and that the risk of an equally severe crisis in the future remains uncomfortably high¹. For many analysts the “too big to fail” problem has not been adequately addressed and the question of government bail-outs vs. the bailing in of shareholders and investors has not been resolved. The risk of a future crisis requiring another government bail-out therefore remains a real possibility.

The intention of the Trump administration to at least partially repeal the Dodd-Franks Act (the iconic regulatory response to the financial crisis) and the possibility of weaker regulation being used by the UK as a bargaining chip in its post-Brexit battle to protect the status of London as a global financial centre, in particular against its European rivals, also point in the opposite direction to the demise of the neoliberal order.

However, it is probably true that in the eyes of the majority of people globally the neoliberal order has indeed ended and that they are looking to government to play a stronger role in addressing the imbalances brought along by it. The Trump administration’s stand in favour of greater trade protectionism and an active industrial policy in any case casts doubt on whether it is ideologically committed to promoting the neoliberal cause.

The end of the neoliberal order goes hand in hand with the end of the trend towards the financialisation of the economy since the 1980s. The resistance to the dominant role played by purely financial interests in economic decision making (for example the accusation that financial interests are responsible for the shift to so-called short-termerism that has held back corporate investment and therefore growth and job creation) remains very real. The view that the financial sector has grown too large relative to the rest of the economy (as demonstrated by the increase in its contribution to GDP and its share in corporate profits) and that it must be made to better serve the real economy has not been abandoned.

The resistance to financialisation forms the background to the criticism of free-market institutions such as (Western) credit rating agencies as playing too big a role in the allocation of capital globally and specifically that they undermine the sovereignty of governments’ whose debt they rate. The criticism generally does not take into account that credit rating agencies are businesses out to serve investors’ demand for information regarding the relative riskiness of different investment opportunities in response to the classic problem of asymmetric information. It also ignores that rating agencies seldom issue unsolicited ratings and that it is the issuers of debt that normally request a rating in order to get access to the available pool of investable capital.

It does not make sense to assume that new non-Western credit rating agencies would come to different conclusions (which would require a different methodology of assessing risk) in favour of the issuers of debt and that such ratings will be accepted by investors as valid (ignoring the long-standing problem of high barriers to entry in the credit ratings industry because of reputational requirements). The bulk of the internationally available capital will after all remain of Western origin for a long time to come.

The second big question is how far globalisation will be pushed back by the Trump administration’s neo-mercantilist resistance to trade deficits and its antipathy towards multilateral trade agreements. Its fixation with the reindustrialisation of America at a point in time when the contribution of manufacturing to economic activity is declining globally and the sector is undergoing a job-destroying flurry of technological change, is not well considered (although in this it is of course not alone). The question is whether this is a viable approach in view of the Fourth Industrial Revolution already being upon us.

How far the world will go down the protectionist route depends on the extent to which the rest of the world follows the US example. Early indications are that there is little enthusiasm for following Trump down the rabbit hole and the US may find it has shot itself in the foot by adopting an anti-globalisation stance. A drastic change in trade policy by the US will nevertheless be disruptive because of its being the largest economy globally.

If the US desire to force US companies to withdraw from global supply chains was to succeed they would be the losers in the global competitiveness race². What the US may gain in import replacement may well be exceeded by its losses on the export side. US multinationals may yet have to adjust their business models to escape the restrictions imposed by the Trump administration in order to best serve their non-US markets.

The third question is how the prevailing strong resistance to growing inequality in income and wealth will play out, especially as it relates to top incomes and executive pay. The difference between equality of opportunity and equality of outcomes has been blurred by the popular perception that the system has been unfairly rigged to benefit a select group of individuals (the 1%) who then furthermore neglect their obligations to society, for example by avoiding to pay their fair share of taxes.

Technological development and the different ways in which it has affected different groups of people has already played an important role in growing inequality and it will continue to do so. Automation will further increase the gap between the returns to capital and the returns to labour. However, the biggest rewards will go to the innovators and the entrepreneurs responsible for the commercial exploitation of new technologies³ .

It is difficult to see how the inequalities that result from the rewards of innovation and entrepreneurship (which have become more immediate and dramatic in the age of information technology advancement) can be softened while maintaining the dynamism of the system. Societies face the challenge of compensating the losers from change (inevitably through some redistribution from the gainers) without distorting values and incentives unduly. This has inter alia caused the debate on the merits of a basic income grant, guaranteeing every person a minimum standard of living, as a possible solution to the problem to gain renewed traction.

A final word

We should be careful not to be overconfident in our conclusions. We will do well to remember the American political analyst Francis Fukuyama who in 1992 declared the final triumph of liberal democracy and the market economy in his book, The End of History and the Last Man. What we are witnessing now is precisely the unravelling of Fukuyama’s thesis.

The final word therefore appropriately belongs to Bob Dylan:

“Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin’ who that it's namin’
For the loser now will be later to win
Cause the times they are a-changin’.”