The international political system is facing a modern-day revolution, in many ways a political depression. As growth appears to be picking up again, will politics get in its way? Or will it be the other way round?
Financial markets in 2017 broadly overlooked political risks. Barring a few blips during the year, major equity indices managed to end the year at a high, tearing through previous records. In most instances, currency markets were the shock absorber of negative political noise and geopolitical risks. Yet, what appears as politics turned upside down is likely to stay that way in the medium-term and derail economic policy. To understand this tussle between politics and economic development and see who may win, it is key to take a step back and identify the underlying drivers that got us here.
First, is economic stagnation. Weak income growth, slowing productivity and unemployment have left citizens feeling marginalised, especially in developed economies. Take the US for instance, where real GDP growth per capita on a ten-year basis is at all-time lows. Add to this the trigger of the Greek debt crisis and we have the recipe for populism in Europe and the rise of anti-EU sentiments.
The second is globalisation, which in many cases is held guilty before proven. It is easy to blame globalisation; be it for immigration, trade competition or income and wealth inequality. Fractures in the global social frame are visible from sour responses to immigration, with demands on border controls growing stronger and Brexit is just one of the many examples here. However, globalisation is a matter of the past. Reversing it is not feasible and isolation is futile. We have already moved well into a phase of multipolarity i.e. a new socio-political and economic order where select countries (poles) establish economic, technological, trade and institutional dominance regionally. The likes of China and a potentially renewed EU are joining the long standing pack of world leaders such as the US and the UK.
Thirdly, the perceived or even real failure of governments to deliver change has further disillusioned the electorate, challenged establishment politics and stoked populism. Voter turnouts across recent elections from the US to France are at historical lows. And while populism as a wave has not hit emerging markets protests against corruption, poor governance and mismanagement of public finances have started to spring, with many of these countries moving towards being more managed or guided democracies. As several countries head towards elections in 2018, it is interesting to watch for new political overturns.
Populism, while here to stay, is not a solution. It may give a sense of victory and protection to some, but only in the short-term. The one key takeaway, is that these political frictions arise from deep-rooted economic discontent. While populism by itself may not be bad, going by the short history of reference, governments and political parties with such agenda appear to function in a disorderly manner, derailing policy reform rather than promoting it as may be promised during election campaigns.
Bench-marking governments will become more vital. There is growing interest in measuring the performance of political parties via the transition of manifesto proposals to policy implementation upon forming the government. Although brave, it is worth encouraging government self-assessments. More importantly, it has to recognised that GDP growth is not the only measure of success. Economic well-being measured by intangibles such as human development, economic and political freedoms, rule of law is equally necessary.
Governments need to be more responsive. Inequality and exclusion from mainstream economy have more to do with domestic policies than globalisation. Be it labour laws that impact job opportunities and job security, vocational training which improves employability and skills or taxation that supports wealth creation and distribution, they are all internal development agenda that have lagged in the race.
Vision statements and medium-term development plans are the next big thing. It is not about penning down an impressive futuristic narrative of a country but about spelling out actionable and measurable policy ideas for transformation. These must be viewed as governance strategies that target institutional framework and policy delivery.
Unlike GDP growth, which is rather easy to track, governments need to be more disciplined in the attainment of other socioeconomic goals and not continue to ignore them until they return to bite back. If this is the case, perhaps politics will not block economics.
Michael O’Sullivan is chief investment officer at Credit Suisse's international wealth management office. Krithika Subramanian is a macro-strategist at Credit Suisse
