Change is in the air as the state rises in the new world economy
A sense of unease prevails amid heightened geopolitical tension, the emergence of "populism", recurring threats of European economic and monetary union disintegration, trade war fears and Brexit.
It does seem fair to argue that, taken together, they signal a challenge to the global world order, which has dominated economic and market outcomes for decades.
A central pillar of this "economic order" is globalisation and the removal of barriers to the free movement of people, goods and capital around the world. The positive correlation between freedom from restrictions on economic activity and rises in productivity, growth and job creation has been extensively documented.
However, economic success is no longer measured solely in terms of GDP growth and employment numbers. Rather, looking ahead, inclusivity and greater equality have become the goals in the pursuit of improving living standards.
The World Wealth Income and Database shows the change in income patterns for different countries over time. The data reveals that since the 1980s increasing income inequality is a common occurrence. In 1914, the top 1% of income earners in the US had a 19% share of total pretax income. This fell to about 10% by the early 1970s, before increasing from the 1980s to more than 20% by 2014.
We may already have part of the answer to this question in the emergence of 'state capitalism'. IMF data shows that general government expenditure among the Group of Seven economies amounts to 39.1% of GDP. The comparable figure for developing economies is 30.7%.
Meanwhile, the share the top 1% of SA income earners has had of total pretax income fell from 22% in 1914 to 10% by the late 1970s. Their share remained around that level until the mid-1990s, after which it climbed to 19% by 2012.
Extensive quantitative easing (QE) pursued by developed economy central banks since the global financial crisis was aimed at lowering credit spreads and boosting asset prices, so that lower interest rates and positive wealth effects could support credit extension and domestic demand. QE succeeded in reaching its goal. Developed economies (and by extension the global economy) stabilised and unemployment rates fell. However, the concomitant increase in wealth has been accompanied by a continued skew in the distribution of income. This is viewed as one reason for the rise in populism in recent years, including in the US and Europe — especially where workers feel "excluded" due to the waning influence of their trade union or where technology threatens jobs.
The analysis above does have a flaw in that it does not account for differences in tax and government social spending regimes, but even so the trends noted above are disconcerting. Whereas income inequality within countries has increased, inequality between developing economies as a group relative to developed markets has been declining. Indeed, globalisation and the accompanying shift towards freer global trade has assisted developing economies in playing "catch-up".
An IMF study published in its April 2018 World Economic Outlook shows that although developing economies have liberalised their trade regimes, developed markets still have more open economies (except in the agricultural sector) if a comprehensive, set trade regime of indicators is considered. Developing markets have also been relatively more active in adopting restrictive trade stances since the global crisis.
It is against this background that the shift of the US towards a more protectionist trade regime should be viewed. For decades the US has promoted free trade, global integration and "fair play". But under the leadership of President Donald Trump it believes it is not being fairly treated, notably by China. Accordingly, the US has illustrated a willingness to pursue trade protectionist measures and has sought to impose stricter immigration laws.
Is the US disengaging from the world? The answer is not clear, but considering the above the US mid-term election on November 6 takes on added significance. To the extent that any "withdrawal" by the US leads to an escalation in global trade protectionism, the outcome is likely to be lower potential global growth and higher inflation than would have been the case. Considering the growing support for populism and the apparent "disengagement" of the former champion of economic liberalisation and integration, the question is whether capitalism will survive in its current form or we are shifting towards a new world economic order.
We may already have part of the answer to this question in the emergence of "state capitalism". IMF data shows that general government expenditure among the Group of Seven economies amounts to 39.1% of GDP. The comparable figure for developing economies is 30.7%.
Governments are the largest purchaser of goods and services. The risk posed by this is the development of "unhealthy" relationships between governments and the private sector if financial muscle teams up with regulatory power.
The increasing influence of governments also extends into capital markets. In aggregate, asset purchases by the G-4 central banks (US Federal Reserve, European Central Bank, Bank of Japan and the Bank of England) through their QE programmes increased from about 10% of G-4 GDP at the time of the financial crisis to more than a third of G-4 GDP by 2017. In time, as the G-4 banks sought to earn a higher yield on these assets (or to support asset prices of other asset classes), they shifted their purchases from government bonds to equities and other bonds.
Furthermore, the expansion of central bank balance sheets has not been limited to the G-4 countries. Balance of payments surpluses also encouraged a build-up of foreign exchange reserves among the central banks in developing economies. In time, a number of these economies established sovereign wealth funds. Collectively, such funds manage assets worth trillions of dollars.
The pursuit of inclusion, equality of opportunity and greater equality of wealth is nonnegotiable and the state will need to play a key role in this. The state needs to be mindful of the effect it has on the ability of the global economy to function efficiently, including price formation, which is critical to the optimal distribution of scarce resources. Through its dominant position in purchasing goods and services and its expanded participation in financial markets, the global public sector is exerting a marked influence – not all of it good – on prices and the harnessing, organisation and distribution of resources.
• Kamp is investment economist for Sanlam Investments.