The past year has been a bad one for the underlying global political and economic order. Consider the following events and trends: * Despite apocalyptic threats from the Donald Trump administration, North Korea’s nuclear and missile capability increased demonstrably to high levels, significantly raising the possibility of a major conflict in the Korean peninsula and beyond; * There is now a serious possibility that the nuclear weapons limitation deal agreed between major powers and Iran in the final year of the Barack Obama government may be reneged on by the United States, with ominous implications for regional stability; * China’s expansionist policies in the South China Sea, the Himalayas, and other geographies gained momentum, posing larger threats to peace and international commerce; * The Trump administration’s hard-line, pro-Saudi, and pro-Israel policies have deepened the Shia-Sunni schism in West Asia and virtually extinguished the residual prospects for peace in the Israeli-Palestinian conflict; * Major civil wars (often with external intervention) continued in Afghanistan, Iraq, Syria, Yemen, Libya, Sudan, Somalia, Nigeria, Pakistan, and Philippines, and flared up in Myanmar; * These and other conflicts ensured that the number of forcibly displaced people around the world attained a new peak of over 65 million, according to the UN High Commissioner of Refugees, with more than a third constituting cross-border refugees; * Despite melting Arctic ice and other clear indicators of planetary stress due to man-made climate change, the United States withdrew from the (rather weak) 2015 Paris Agreement on greenhouse gas emissions, jeopardising prospects for an environmentally sustainable global future; * Britain’s painful divorce from the European Union (Brexit) ground on, with growing certainty of unfortunate consequences for both Britain (mainly) and the rest of Europe; * The World Trade Organization made no significant progress in liberalising multilateral trade arrangements, while its existing (and important) dispute-settlement machinery was weakened by American obstacles to the appointment of new judges; * The United States withdrew from the already negotiated “super regional trade agreement”, the Trans-Pacific Partnership, and ensured that the Transatlantic Trade and Investment Partnership was put on a back burner. Against this sombre background of a fraying world political and economic order, what happened to global economic performance in 2017? One would expect this performance to have been lacklustre. After all, common sense suggests that expectations of peace and international cooperation should be conducive to good economic performance and, conversely, the erosion of such desiderata might lead to weak economic performance. In fact, 2017 turned out to be a banner year for global economic growth and the performance of equity markets. At market exchange rates, the $80-trillion world economy grew faster than 3 per cent for the first time in a decade (leaving aside the recovery bounce in 2010 from the Great Recession of 2008-9). The $19-trillion US economy picked up momentum to grow at 2.2 per cent, with unemployment at its lowest rate since 2000, inflation around 2 per cent, and the stock market booming. The other economic behemoth, the $17-trillion European Union also beat all expectations to grow at 2.3 per cent, the fastest in a decade, powered by strong performances of Germany, France, the UK and even Italy. The other members of the “Big 4”, China ($12 trillion) and Japan ($5 trillion) also turned in unexpectedly strong growth of 6.8 per cent and 1.5 per cent, respectively. Most other significant size economies (above one trillion dollars) also accelerated in 2017, with India being an unfortunate exception. Quite clearly, 2017 was the best year of synchronised global economic expansion since 2007. It wasn’t just economic growth. Unemployment rates fell in most major economies and inflation remained low.
Unsurprisingly, equity markets boomed across the world, with even Japan boasting the highest level of its Nikkei index in 26 years. What explains this apparent paradox between a fraying world order and a robust global economy? It’s hard to find a single powerful explanation, but here are some which together may be meaningful: * Some threats to the global political order, like the enhanced North Korean nuclear-missile capability, the fragility of the Iran nuclear deal, growing Chinese geopolitical assertiveness, and the deepening Sunni-Shia fissures, may be real but do not seem to affect significantly global economic activity and expectations in the short run. Of course, if any of these lead to a hot war, the economic consequences may be severe; * The long list of civil wars in West Asia, Africa, and parts of Asia undoubtedly take a major toll on lives, livelihoods, and economic activity in the affected regions. But these areas do not make a significant contribution to global economic activity. Of course, if the conflicts did not exist or were solved, over time, strong economic development could make a material positive contribution; * Similarly, the 65-million-plus forcibly displaced people suffer terribly and have miserable lives but their displacement does not materially affect global GDP or its growth; * There are plenty of studies to show how man-made climate change and environmental degradation is already affecting people in many geographies adversely, but there are at least two reasons why this may not show up in world GDP numbers. First, GDP, even at the national level, measures only the flow of economic activity and incomes, and fails to account for the ongoing destruction of the stock of both man-made and natural wealth. Second, much of the real threat to planetary life and activity (including economic activity) lies in the future when average global temperatures increase by more than 1.5 degrees centigrade. Our current myopic policy weaknesses will take their major toll of global economic activity in future decades when our children and theirs will bear the brunt; * The threats to free international commerce are still mostly that, threats, or foregone opportunities from further liberalisation. The GDP-hurting economic pain will come when protectionism surges and world trade declines. Similarly, the economic pain of Brexit still lies ahead, mostly in the form of slower growth of the UK economy. Moral: The troubles in the global order are real, even if they are not yet reflected in current, buoyant GDP trends. Happy New Year!
The author is honorary professor at ICRIER and former chief economic advisor to the Government of India.