Normalizing Economy Facing Geopolitical Risks

Posted by on Nov 6, 2013

Normalizing Economy Facing Geopolitical Risks

Five years after the ‘great recession’ of 2008, the global economy is showing the early signs of ‘back to normality’. Chances are that 2013 will mark the tipping point. Normalization in common economic jargon means a global economy which is growing at or around its long term growth path and is subject to cyclical variations together with regional divergences in economic performance. Clearly, the global financial and banking crisis is by and large over- thanks to the gigantic bail out by many governments and central bankers. The housing market is also gradually returning to normality. Even the EU political debacles surrounding the euro and its associated political economy issues appear to be managed down. Predictions of the EU split have proven no more than false alarms or hasty predictions by those who have clearly under-estimated the collective intelligence and commitment of the European leaders to stay the evolutionary course of their political integration.  Whilst the banks are back in a fairly sound financial status, the same could not be said about their respective governments. In many countries, financial interventions by governments have left the national fiscus in fairly vulnerable state- that is if not already bankrupt. Countries like Ireland, Spain and Portugal are in dire fiscal conditions, whilst UK, USA and France teeter on the verge of fiscal vulnerability.

 

All said and done, it is by now clear that since August 2008 the unprecedented measures taken by national governments and the central bankers, mostly in the OECD member countries, have averted a total global economic and financial collapse. This has been achieved, to a large measure, at the expense of the poorer groups within the society. Because when the government finances are short, it is the poor who ultimately bear the brunt of it, especially in the short term.  With job shedding in the public sectors and drastic cut back in public subsidies and welfare budgets, the societies experience all kinds of social tensions. Political leadership in such a milieu faces a major credibility deficit. Lack of confidence in political and social leadership in turn undermines the societal cohesion, destroying much hard-earned social capital.

 

On the economic front, one of the direct effects of the monetary policy stance has been a sustained low interest rate policy worldwide and a global capital market operating in a liquidity trap.  Such prolonged configuration has many political economy side effects, two of which merit special attention. One is the rise in speculative activities diverting resources from real economic enterprises. Consequently, constructive and job creating ventures are substituted by financial transactions that offer high short term return on capital.  Predictably then even when economic growth is registered, the level of employment creation is either stagnant or at a much lower scale. Whilst this is a worldwide phenomenon, for the emerging economies it entails profound socio-political risks. Some of the emerging economies may even find the consequences too problematic- politically speaking. In such conditions, countries such as Argentina, Russia, South Africa, India and Nigeria are in danger of degenerating from an emerging economy status to a “sub-merging” state, however gradual it might be. The second, and as concerning, effect is the rapid rise of income inequality at both national and global levels. The combined effects of these development lead to socio-political instability.

 

Globally, regional economic performances are bound to differ considerably. As economic normalization takes root, it is more so that regions with better and superior fundamentals will begin to benefit more and perform at a higher sustainable growth levels. Paying attention to the basics of adequate infrastructure, governance institutional integrity, policy consistency and human development is likely to be the key differentiator in inter- and intra-regional growth paths.

 

Ironically, at a time when the global economy is on the path to normality, the geo-political temperature has risen substantially. This is so not only at the national level- as mentioned above-, but more concerning is the serious global tensions in the South-East Asian region, Middle East, and sections of the African continent. The cold-war style international rivalries among USA, China, and Russia further compound the uncertainties. The upshot of the heightened geopolitical global risks is unsettling for economic recovery.

 

For Africa, and Sub-Saharan Africa in particular, the return to economic normality is critical to ensure its superior economic growth performance. The rise of national and regional instability and military confrontations in parts of the continent, however, is bound to undercut growth and undermine the process of socio-economic development.