Fresh Approach Needed to Policymaking Amid Global Uncertainties
By Nov. 8 U.S. time, the results of the bitterly fought U.S. presidential election will be out. According to media reports and exit polls, the Electoral College system favors Hillary Clinton to become the first woman President of the United States. Republican candidate Donald Trump has already declared that the election is rigged in her favor.
But the real divide in the U.S. presidential election harks back to what the Brexit revealed in the June referendum. Brexit caught many by surprise because it exposed the undercurrent of deep civil discontent.
Traditionally, Western political parties have been divided into "the left," a coalition of socialists and trade unionists, and "the right," comprising more conservative businessmen, landed gentry and nationalists. In the 1990s, with the rise of the centrist left, including the election of British Labor Party Prime Minister Tony Blair and U.S. Democratic Party President Bill Clinton, the left adopted a liberal free-market ideology, which brought prosperity without inflation, but also much greater social inequality. The gap between the rich elite 1% and the rest of the population that represented the other 99% grew wider than ever. Globalization led to the greater mobility of goods, services, information and labor.
The best of times also brought along with it the worst of times. Technology opened up untold wealth to those who had the knowledge to innovate, but the arrival of robotics, 3-D printing and productivity increases meant that those who were members of the working class were in fear of losing their jobs in the near future. Furthermore, fresh waves of immigration into Europe has heightened fears about increased competition for jobs and raised concerns over integration among different religious and linguistic groups.
The global financial crisis exposed the extent to which financial markets have favored Wall Street elites at the expense of the rest. Despite many examples of market manipulation, fraud, errors in judgment and huge risks that required massive state bailouts worth trillions of dollars, no bankers have gone to jail. Discontent is brewing among ordinary workers who are still poorly paid and whose pensions are being squeezed by quantitative easing measures. They feel that one who steals a couple of thousand dollars goes to jail, but one who steals billions goes scot-free. Everywhere, distrust of bankers, governments and politicians remains high.
After Oxfam revealed in 2015 that assets owned by 1% of the superrich exceeded that of half the world's population, it became clear that policies enacted after the 2008 financial crisis had favored the top 1% at the expense of the rest. Unemployment in Greece and other crisis-hit economies rose to over 20%, but this also continued to be the norm for young African-American males. In short, the narrow elite minority became richer, while the rest became angrier.
The effects of climate change have complicated matters further. Many forget that Syria, Iraq and Afghanistan are water-stressed countries, as are Yemen and many parts of sub-Saharan Africa. Borders drawn by colonial powers in the Middle East and Africa were often straight lines that bore no resemblance to geographical realities and tribal alignments. Hence, increasing human migration due to climate change is creating local conflicts that eventually escalate into civil wars.
The English-speaking world tends to forget that much of the so-called liberal ideology of free markets is channeled through opinion leaders writing for dominant newspaper chains and television channels. However, as more and more people have access to the internet, mobile phones and social media, everyone is suffering from an information overload, and it is not easy to distinguish between truths and lies.
Global warming is a good example of what one commentator labeled as a "post-truth." Even though there is ample scientific evidence to show that excessive resource usage has led to pollution, rising global temperatures and natural disasters, there are those who refuse to believe such data. Belief in conspiracy theories is rife in many countries today.
This complex mix of globalized politics, disruptive technology, social media, climate change and social inequality has made existing ideologies — both left- and right-wing — obsolete. Mainstream economics is unable to offer solutions to the global deflation trap because it is a combination of demographics, global competition, the way financial markets function, distortive taxes, paralyzed policymaking and entrenched bureaucracies that make simple economic models inadequate and downright useless.
No economy can insulate itself from the effects of globalization in terms of capital flows, trade, technology, climate change and geopolitical intervention. Even the International Monetary Fund and Bank for International Settlements are aware that traditional economic analysis based on national boundaries is inadequate when there are huge leakages and spillovers from national policies to neighboring countries. Quantitative easing to stimulate the economy by encouraging banks to give more loans is a good example of how central banks could quickly lose control of national monetary policies. And even international agencies are unable to produce a consistent global model to guide policy formulation in the 21st century.
Like all truths, the devil is in the details. Each policymaker must make decisions amid considerable uncertainty, and take both unique national characteristics and feedback from trading partners into consideration while keeping an eye on policy decisions made in countries whose currencies are used as to maintain foreign reserves. Larger countries have a greater degree of freedom, but smaller economies are now swept away in global currents.
Complexity economics, which views an economy not as a system in equilibrium but as one in motion, perpetually constructing itself anew, is now evolving by incorporating different disciplines such as psychology, anthropology and systems engineering used to simulate different economic scenarios as conditions vary. This approach to economic thinking is still in its infancy, but worth exploring in the long run.
Andrew Sheng is a Distinguished Fellow at the Asia Global Institute at the University of Hong Kong.
A distinguished fellow of the Asia Global Institute at the University of Hong Kong and a former chairman of the Hong Kong Securities and Futures Commission.
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