Developing economies and Mr Trump

What does Trump mean for developing countries, asks Jayati Ghosh? While his economic policies are likely to exacerbate instability in the global economy, resulting in financial volatility, capital flight and disruptive trade flows, his foreign policies may well result in more wars being fought on our territories and between our peoples. While all this does not bode well for developing countries, it also opens up an opportunity to reconsider current policies in favour of more independent, equitable and sustainable paths of development.

TO say that the election of Donald Trump as US President introduced many new elements of uncertainty into global politics and economics is to belabour the obvious. Some of his declared agenda has already been embarked upon: further deregulation of private activity especially all controls on private corporate investment; attempts to control borders for migration and trade; rejection of international organisations and moving away from further US involvement in mega-regional trade and investment deals.

The foreign policy aspect is a little fuzzier, especially given the establishment suspicion about his prior Russian connection, but in general it is safe to assume that ultimately there will be more continuity than real change in this matter. Given the complete mess that US foreign policy has created in the world over the last few decades, that continuity is not necessarily very good for the rest of the world. Such change as does occur is likely to be even more adverse for progressive people in his country and across the world, since it will facilitate the further trampling of human rights. 

There has been much discussion of the perception that Trump is seeking to bring back a 21st-century version of Reaganomics: a combination of rising fiscal deficits resulting from lower taxes (especially on the rich) and more public spending on the military and on physical infrastructure, with higher interest rates delivered by the US Federal Reserve. This is supposed to create a domestic boom led by private investment, which is presumably to be financed yet again by foreigners willing to pour their savings into US financial assets, particularly Treasury Bills, which in turn has led some to predict that such a US boom will once again pull the world economy along through the increased demand it will generate for the rest of the world's exports. 

But it is a moot point whether this agenda will actually be achieved. It is probably misplaced to believe that Trumponomics will succeed in generating a boom in the US and thereby in the rest of the world. The basis for this belief, which is clearly what is driving stock markets in the US, is the perception that increased public spending and lower tax rates will provide a fiscal stimulus to boost the economy, even if it does at the same time increase inequality and disproportionately favour the rich. But it is far more likely that Trump's policies will deliver more inequality but not the kind of boom that is being anticipated.

As of now, the precise tax proposals that the Trump administration itself favours are not known; but the proposal by Speaker of the US House of Representatives Paul Ryan is supposedly 'revenue-neutral', giving tax cuts in some sectors and categories while removing some deductions. The overall macroeconomic benefit of this would be limited, although it may well imply a further redistributive shift away from working- and middle-class families in favour of the country's corporations and rich individuals.

In any case, tax cuts alone are known to have limited impact, and the expenditure proposals are even less dramatic. And the continued presence of fiscally conservative Tea Party activists in the President's own party will prevent the possibility of much deficit expansion.

There will be big increases in military spending, which will definitely affect the rest of the world and may cause a further round of US military intervention of different sorts that would add to global insecurity. But in fiscal terms, these are to be counterbalanced by equivalent cuts in social programmes.

Much of the touted 'public investment' would be in the form of public-private partnerships, in which the government does not invest directly but underwrites a significant part of the private investment or enables the securing of cheap loans for private investment. This has had very little success in most countries, with much lower levels of investment than were anticipated. Usually the fiscal costs are delayed but much larger than expected, because costs incurred require user charges that are too high to enforce. Such PPPs may suit several of Trump's cronies and those (including in real estate, a sector of particular personal interest to the US President) who would benefit from certain infrastructure investments, but they are unlikely to generate significant increases in either physical infrastructure or overall investment rates.

Whatever fiscal expansion occurs will come in combination with a monetary policy 'shock' in the form of higher interest rates, in an economy that has grown used to near-zero interest rates for nearly a decade now. This could well attract mobile capital back to the US - and thereby cause different degrees of discomfort or crisis in many emerging markets - but that in turn will cause an appreciation of the US dollar, which too must affect profitability in the tradeables sector. In purely macroeconomic terms, it is hard to see how this combination can deliver significantly higher economic growth or employment in the US, especially when technology shifts are already leading to lower demand for workers.

What then of the other strategies, the physical and trade walls designed to protect US residents from the depredations of foreigners? The infamous wall along the Mexican border is now estimated to cost $15-20 billion, but even that is not much for a Keynesian stimulus.

The other wall - the imposition of high punitive tariffs on goods coming from Mexico and China, as well as from other countries seen as 'threats' to US production - may well get a few dramatic and highly symbolic gestures in its direction, and may mess up trade relations for a while. But it is likely that the president's basic and well-known instinct for pushing business and profit, irrespective of the impact on workers or consumers, will win over the protectionist rhetoric that helped him get elected. It will also do little to bring manufacturing jobs 'back' to the US, especially as technological change continues to erode employment in this sector. So the workers and other non-traditional voters who installed Trump in his current position are likely to experience a worsening of material conditions, because of little new job generation and public spending cuts that reduce their entitlements. But import demand from the US will continue to shrink and add to the forces that are slowing down global trade.

What does all this mean for developing countries? Remember that this is an already volatile global economic environment. Global capitalism had clearly reached the limits of a particular strategy of accumulation, as evident in the 'secular stagnation' that seemed impervious to massive injections of liquidity and near-zero or even negative interest rates, and in economic trajectories that no longer seem to generate stable and regular employment. 

The most immediate concern is of capital leaving emerging markets once US interest rates are raised, creating potentially disorderly situations. The resulting volatility is likely to be compounded by further financial deregulation that will spread from the US to other countries. This is doubly dangerous for many 'emerging markets' because many of them had responded to the global crisis by allowing massively leveraged expansion, and much of that is currently in the process of winding down. Asset markets - particularly of land and real estate - are experiencing a downswing in most countries, rendering them especially vulnerable to financial crises that could originate from an initial outflow of capital to the US.

Obviously, this would be exacerbated by the disruptive impact on global trade of several proposals of the Trump administration. The ongoing slowdown in international trade is likely to get worse, and also more uncertain with the unpredictability of US moves. Export of commodities from South to North is unlikely to be an engine of growth in the immediate future. This sounds like bad news for many developing countries, and will be so in the short term, but it need not be so bad if it forces a different approach from one that focuses on exports to the North (and therefore treats wages only as a cost) to one that looks at potential in domestic markets and regional arrangements (and therefore treats wages also as an important source of demand).

Certainly, no tears should be shed for the Trans-Pacific Partnership (TPP) that is now effectively dead in the water after Trump announced the US' withdrawal from the pact. It was a bad deal that did little to enhance desirable trade. Instead, it provided inordinate power to corporations, through stringent and unwarranted acceptance of tight intellectual property rights monopolies; reducing possibilities of public regulation in the interests of workers, the environment and the health and other human rights of citizens; and allowing investor-state dispute settlement in wide-ranging cases of supposed infringement of investor rights. These would definitely have harmed workers and consumers in all the TPP member countries.

Developing countries that had put so many eggs into the TPP basket will now be forced to think more creatively about both trade and policy options, which would not be an adverse outcome. The danger is that - despite the breakdown of this agreement - such deregulation and greater power to corporations will be granted anyway by the Trump administration, and sheer competitive pressure will then force governments across the world to fall in line. Avoiding this worst-of-all-worlds scenario will require constant public vigilance and mobilisation in all countries.

Similarly, financial markets will be more unstable and volatile, and countries across the world may well have to brace themselves for another round of financial crises. This time, the implications may be worse because of the difficulty of using the same old solutions of large publicly funded bailouts to rescue banks and other financial institutions. The global race to environmental destruction pushed by further deregulation in the US and egged on by international competition in trade and investment, will also have to be fought with public pressure in all countries.

Another concern for developing economies comes not from the economic policies of the Trump administration but from its foreign policies. This US administration is hawkish, but in a new way: possibly more confused with Russia, but much more aggressive with China. Global conflagrations can begin with minor conflicts that explode out of proportion, and the danger for developing countries is that the wars will be fought on our territories and between our peoples. The propagation by the current US government of a sullen, petty-minded pseudo-nationalism is already finding echoes in too many other governments, including in the developing world where this attitude also similarly involves the suppression of any kind of domestic dissent.

Periods of disruption are unpleasant and do throw up all sorts of (mostly bad) outcomes. But they are all periods when the older certainties are thrown aside, and some of these deserve to be discarded. The belief in 'free' trade and globalised capital being all that is required for development was always wrong, but now it simply cannot be entertained. Now, more than ever, this must force more creative thinking about economic strategies in different parts of the world. Developing countries must stop looking to the US for leadership either economically or politically, and seek to forge new paths based on more equitable and democratic internationalism which also enables more equitable and democratic development within their own countries.                                

Jayati Ghosh is an economics professor at Jawaharlal Nehru University in New Delhi. The above is a revised version of an article that will appear in a forthcoming issue of the Real-World Economics Review.

*Third World Resurgence No. 317/318, Jan/Feb  2017, pp 13-15