The Financial Express

Gathering economic clouds

| Updated: October 27, 2018 21:12:35

Gathering economic clouds

There is growing unease in the global economy: some ostensibly 'emerging' or 'frontier' countries have nose-dived into deep financial straits, with sky-rocketing debt and plunging currency values; stock-markets have been so choppy that any 'good' day, that is, an index climb during any particular day's transactions, prompts unrealistic predictions; the onset of the worst tariff-war since the 1930s, not only widening but also deepening; economic sanctions directly emasculating the target country but indirectly changing trade patterns, circumscribing trade transactions, and leaving every country less well off.

The list could go on, but the underlying problem should not be missed: the most vibrant spell of global economic recovery from the 2008-10 Great Recession is beginning to slow down, showing signs that any other non-market jolt may torpedo whatever progress has been made.

According to the International Monetary Fund (IMF) records, 2 countries have already defaulted (Republic of Congo and Mozambique), 6 are in 'debt distress' (Chad, Eritrea, Somalia, South Sudan, Sudan, and Zimbabwe), and 16 remain 'high-risk' debt-threats (mostly in Sub-Sahara Africa, but Afghanistan, Haiti, Tajikstan, and Yemen from outside). Anyone watching 2018 news unfolding would think only Argentina, Pakistan, Sri Lanka and Venezuela, among a handful of other hitherto more economically robust countries, desperately seek bailouts. Yet, some of the most indebted countries also happen to be developed countries. In Nat Berman's Money Inc list, only 2 of the Top-20 such countries are not from the Atlantic zone: with $18 trillion, the United States is the most indebted, while 20th placed Norway is $623 billion in debt, leaving China and Hong King from outside the Atlantic zone, each with $1.4 trillion debt (https://moneyinc.com/20-countries-currently-debt/).

According to a recent Damoclean index, measuring exchange rate crises, 7 emerging countries, with scores of over 100, have been listed: Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine, in descending order, from a score of 175 for Sri Lanka down to 100 for Ukraine. Part of the causal factors is the trade protectionism underway, part from some developed countries returning to normal market behaviour from zero interest-rate stimuli policy practices, and part to the slow retreat of China's economic punch (its 6.5 per cent GDP growth this third 2018 quarter is the lowest for the longest of time). If that does not show the inter-linkages between economic crises on the one hand, and between those crises and countries on the other, there is a huge market-failure underway, reflecting an information gap. Donald J. Trump's protectionist stance is contributing to these ailments directly on one front, while his 'fake news' weapon is becoming a market 'White Elephant', that is, causing disproportionate costs from distorting speculation.

This year marks one of the most volatile stock-markets in recent memory, exceeding a similar reputation 2017 had. For instance, Nasdaq had a 4.0 per cent increase in all of 2018, but its closing daily values have the least cor-relationship with the more stable previous years. New York's Dow Jones Industrial Average has gotten used to the unthinkable event of 400-point swings this year: the DJIA stocks fluctuated more than 1 per cent in a single day more than 25 times in just the first quarter of this year when, in the entire tumultuous 2017, it registered a whopping 50 such occasions. China's Shanghai Composite Index also shows tremendous turbulence from the brewing trade tensions, but China's crackdown on shadow banking has also been a destabilising factor.

Two contrasting forces may be hypothetically bashing stock markets: declining economies shifting towards protectionist measures; and ascending economies shedding governmental controls. The story has long been told that such an occasion arises when world leadership changes: with the United States loudly retreating from the free-market, and China desperately beginning to don the leadership mantle by liberalising. Could these be in a change-of-guard mode?

Developments like these can no longer account for playground outcomes given the increasing complexities of the global economy. China's relative liberalisation is not only overdue, but masks the exorbitant, extractive investment costs it is imposing upon borrowing countries. Its BRI ('Belt and Road Initiative') project has loaned out too much money, sometimes at rates far higher than counterpart World Bank rates that many of the debt-ridden emerging countries, like Pakistan and Sri Lanka, are now beginning to feel the pangs. Borrowings involve seductive offers, but debt negotiations turn downright sour, spoiling some age-old relations. So much of inducements went into implementing the BRI project across so many countries that recipient countries were just too duped to do anything. They could not easily go to the World Bank because of greater scrutiny, conditioning, and too protracted long-term assessments they have not structured for. China dispenses with all of that, doles out what countries need, then strangles them with high interest rates. Failures automatically mean leasing out property for the long term, often converting adjacent ports China itself has helped construct, into manufacturing export processing zones. China's so-called 'debt-trap' has thus far netted 8 countries: in decreasing order, from Montenegro and Pakistan with slightly under 50 per cent of their GDP owed to China, to Djibouti, Kyrgyzstan, Laos, Maldives, and Mongolia staggering between 55 per cent and 85 per cent of GDP debt.

Finally, there are sanctions, of increasing numbers, rocking the boat of economic stability. Apart from old-timers, Cuba and North Korea, the sanctions list included Iran this year (from next month) for reasons too arbitrary to make sense: China, the European Union, and Russia do not believe Iran is violating any of the conditions relaxed after the previous sanctions were lifted (over nuclear weapons). By deciding not to follow the United States, any exchanges with Iran put them on a potential sanction list. Already on that list are the Ivory Coast and Syria, with others standing in line to be affected by default, that is, for trading with sanctioned countries. This is the latest bug that may push global peace towards the brink. For instance, when Iran's sanctions come into force, trading partners that have decided not to follow the US sanctions, as China, many in the European Union, and India may be jolted by Trump's abrupt diplomatic behaviour. Worse outcomes await around the corner.

Not only would that be unfriendly between stable past friends, but if any former US trading partner seeks to recuperate or retaliate by going to China, matters will then clearly get out of hand. China became the leading investment supplier by grabbing countries that the World Bank might not have helped, like Bangladesh over the Padma Bridge, but here is a case with China's trade in which dejection with unilateral US trading behaviour swells China's trading partners. The global economy would jump out of the frying pan towards the fire, God forbid.

Dr. Imtiaz A. Hussain is Professor & Head of the Department of Global Studies & Governance at Independent University, Bangladesh.

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