Terms of Trade: Economic dogma won’t do the world any good

The economic crisis has deepened to a point where nothing seems effective; institutions expected to lead are offering homilies instead of actual solutions

2025 is going to be the worst year for global GDP growth since 2008 barring the recessions of 2008 and 2020, the World Bank’s latest estimates say. The Bank has also said that per capita income convergence between the global south (EDMEs in Bank’s technical parlance) and the advanced economies has almost stalled if one were to take out India and China. This is going to have serious repercussions for poverty reduction and employment generation in parts of the world where the population is expected to grow the most in the future. China’s population is already declining and India is now below replacement levels of fertility. That this is happening at a time when advanced economies are themselves growing at a slower rate speaks volumes about the nature of the crisis.

In the advanced economies, the economic crisis has now reached a different stage where nothing seems to be working. (Representative photo)

In the advanced economies, the economic crisis has now reached a different stage where nothing seems to be working. The political aspiration for a break from the globalisation consensus has brought in regimes which can only think of banning movement of both goods and people. Both of these threaten to inflict a serious supply shock to these countries, especially the US, and will likely inflict more pain than gain for even the underclass. This is exactly why even union leaders are physically resisting government agents out to deport illegal foreign workers in places like California.

How did we reach this quagmire and is there a way out of it? The institutions which are expected to take a lead in resolving this situation seem to be delivering homilies rather than actual solutions. The Bank’s latest Global Economic Prospects which flagged the statistical trends described above, for example, prescribes a three-pronged way out of the crisis: more trade liberalisation, more fiscal discipline and more employment generation. If the advanced economies are feeling a political pressure to shut their doors to Global South’s exports rather than have more of them and if the rich countries are going to be diverting their funding from things such as climate finance and other kinds of development assistance towards defence spending and tax breaks for their citizens and companies, how exactly are non-rich countries expected to even pursue trade liberalisation and fiscal prudence?

What is more important to keep in mind, and the Bank’s latest report does an extremely good job of flagging it, is that things weren’t exactly great even before Trump threw his MAGA 2.0 spanner in the wheels of the global economy. The euphoria surrounding globalisation and its benefits started losing steam in the aftermath of the 2008 global financial crisis which is now almost two decades behind us. Trump 2.0 and the rise of right-wing populism in many high-income counties is only a manifestation of this trend gaining political momentum.

The key to solving this problem is not to prescribe do what we were doing before 2008 but to ask how 2008 happened? The root of the 2008 crisis lay in the state turning a blind eye to toxic financial innovation because it helped create demand without purchasing power (directly in the housing market and indirectly in the entire economy) in the world’s largest economy, namely, the US. Too bad that the entire thing came crashing down. Everything else, the derailment of the income convergence journey of the Global South included, follows from there. While China managed to grow into an even bigger economic and technological giant (the latter is especially pronounced after the 2008 crisis) by making it a zero-sum game for a while, the situation seems to have become one where it is no longer tenable from at least the US’s perspective.

So, what is to be done? Three key contradictions need to be worked upon.

There is no doubt that free trade has created a large consumer surplus in terms of goods and services being produced or offered in the most cost-effective locations. However, the distribution of this surplus within the advanced countries needs to be examined far more critically than it has been so far. Trying to handle this contradiction by an ad infinitum reiteration of a doctrinaire defence of free trade is tantamount to asking the working class in the first world to accept that it should travel in the boot of a more expensive car and be happy about the car being better whereas it used to be on the passenger seat in a cheaper car before globalization took away their jobs.

The best way to solve this problem is perhaps not to force companies to relocate production back to the rich countries. This is like throwing the baby out with the bathwater. What is more important is to rejig the surplus sharing arrangement between companies who are benefitting from such relocation and the workers who are now just consumers without stable and well paying jobs. This is one place where the MAGA coalition (although not necessarily Trump) actually has some valid points such as going after vested interests in American capitalism.

The third, and perhaps the most provocative of the lot, is actually outside the realm of the economic. This was appropriately flagged in Gerard Baker’s Free Expression column in the Wall Street Journal this week. “The (Trump) Musk divorce is symbolic of the tension at the heart of the new Republican coalition. Mr. Trump’s working- and middle-class multiethnic alliance is driving the highly successful cultural counter revolution on the border, race, sex and national security. But those same voters are none too keen on Mr. Musk’s free-market approach to trade, migration, taxes and spending,” he wrote.

The problem is best explained by borrowing from economic theory. Keynes, who is rightly considered the biggest modern economist in the world, earned this place because he convinced the world and policy making economists that their belief in the Say’s Law (supply creating its own demand) was wrong. While economists learnt this lesson almost a century ago, politicians across the world, more so in the advanced world seem to be fixated on a Say’s law of liberalism which is making them believe that ethnic, racial or other cultural tensions including a backlash against woke politics can be taken care of by pretending that they do not exist.

The fight against the Say’s law of economics – which is what the dogmatic defenders of globalisation are selling us – cannot be fought without getting rid of the misplaced belief in what can be described as Say’s law of liberalism. Can the world get a politician who can take on both these dogmas? This is what will determine our fate in the days to come.

Roshan Kishore, HT’s Data and Political Economy Editor, writes a weekly column on the state of the country’s economy and its political fallout, and vice-versa