Moving into an uncertain economic world

Global economic trends will be affected by both domestic and world politics

Shahid Javed Burki August 02, 2021
The writer is a former caretaker finance minister and served as vice-president at the World Bank

Conservative economists believe that their discipline has all the truths needed to understand and chart human behaviour. They have scant respect for political scientists, sociologists, anthropologists – even for historians – and their readings of how and why human beings behave.

But that approach is changing. Politics is a hard discipline to ignore as we reflect on the direction in which the global economy is moving and the place it is likely to get to in the years ahead. Global economic trends will be affected by both domestic and world politics.

The United States, still the world’s largest economy, is being torn apart by extreme divisions in domestic affairs; China, soon to be the largest economy in the world, is struggling to find a way of dealing with minorities in its largely homogenous population; and India is tearing itself apart by bringing to surface religious and ethnic differences. The IMF, in a recently released report on the state of the global economy, has said little, if anything at all, about political developments in the parts of the world it has analysed. That said, it took account of the effect the Covid-19 pandemic is likely to have on world economic trends.

The institution warned on July 27 when it released its latest World Economic Outlook report that the gap between rich and poor countries would widen because of the response to the disease. It maintained its 2021 global growth forecast of 6 per cent largely because more developed economies, including the US, would have slightly higher growth than in previous predictions while growth in developing countries is expected to be more sluggish. The income gap between these two parts of the world would, therefore, widen. The IMF projected that the US economy would increase by 7 per cent in 2021. The euro area was projected to expand by 4.6 per cent and Japan by 2.8 per cent. Rapid increase was expected for China at 8.1 per cent and for India at 9.5 per cent. The projections were lowered for both countries. The Chinese rate of growth was reduced because Beijing is scaling back public investment while India was downgraded because of a serious second wave of the virus slowing economic recovery. But for both countries, political developments also played a role.

Mutations of the virus remain the most daunting challenge facing the global economy. The IMF projected that highly infectious variants could derail the recovery and wipe out $4.5 trillion in the world’s gross domestic product by the year 2025. This is 5.3 per cent of the 2020 global GDP of 84.54 trillion.  

About 40 per cent of population in advanced economies has been fully vaccinated while that proportion was just 11 per cent in emerging markets and low-income developing countries. Lack of resources was one reason for this difference. The spread of the more contagious Covid-19 variant called “delta” would be faster in the developing world. This difference was the consequence of the poorer parts of the world to vaccinate a significant proportion of their population against the virus. The IMF board announced in July that it had approved a plan to issue $650 billion worth of reserve funds countries could use to buy vaccines, finance healthcare, and pay down debt. Once this resource becomes available, developing countries should be able to spend more on inoculation programmes.

Read More: Political stability imperative for sound economy

As some historians have argued, India’s early economic success was in part the result of its ability to establish a political system that accommodated reasonably well different segments of a very diverse population. Under Prime Minister Narendra Modi and his Bhartiya Janata Party, the country has taken a giant step back from that achievement. Serious conflicts have broken out between religious and ethnic groups because of the approaches adopted by BJP. The recent conflict in northeast India is an example of the toll taken by the BJP’s handling of diversity. Four new states were carved out of Assam by the government then headed by Prime Minister Rajiv Gandhi. The aim was to provide the local people some say in the way they were governed. Some of these people were seeking independence from the Indian Union. However, the way the new boundaries were drawn created new problems. The state of Mizoram, for instance, disputed the control of 193 square miles of territory that lies between it and the state of Assam. On July 26, there was an armed conflict between the Assamese and security personnel from Mizoram which has a large population of animists who live in the state’s heavily forested area. The episode left five Assamese policemen dead and several injured. There were no deaths but only injuries on the Mizoram side.

Another injury the Modi government has inflicted on what was once called the ‘idea of India’ is to downgrade its large Muslim population to the status of second-class citizens. The size of the Indian Muslim minority is estimated at 200 million which makes it the world’s second largest Muslim community in the world after Pakistan. These moves have already created law and order problems for the Indian state. Anticipating troubles, the Indian authorities moved against the long-time Muslim residents of Delhi when the Indian capital was visited by US President Donald Trump. Several Muslim leaders of the community were arrested and jailed.  

What about India’s economic future. In its latest issue, The Economist had an answer. “The symptoms are a peculiar mix,” wrote the magazine. “They include sluggishness, a general malaise, depression, and an inability to focus. It is bit like long covid. Except that the victim of this particular form of delayed recovery from the virus is not a person. It is India’s economy. Some 4 million Indians have died of Covid-19 by the end of June, an estimate endorsed in a study published by Abhishek Anand and colleagues at the Centre for Global Development, a think-tank in Washington DC. That is ten times as many as official figures show. It suggests that the virus has been much deadlier than in hard-hit rich countries such as Britain and America, whose mortality rates looked roughly similar to India’s until its devastating second wave. So it is not surprising that the country is struggling to get back on track.” Most of India’s problems were the result of politics. Prime Minister Modi, by suddenly locking down the country, was putting on display the power that he had over the Indian system. Modi now presides over what is evolving into an authoritarian state.      

Politics also intervened in the US by creating suspicions among some groups that vaccines would cause more problems than provide solutions for tackling the virus. Wearing of face masks also became a political issue. Not just mandating the wearing of the masks but even recommending their use was seen as excessive interference by the government in people’s personal lives. The unvaccinated were not protected against the delta variant. Consequently, there was a sharp increase in the incidence of the disease as well as deaths from it in the states in the parts of the US that are called the “Trump country”. In those parts Trump’s authoritarianism has worked and was applauded by his base. Politics , in other words, is proving to be drag on economic recovery.



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