The world economy seems to be coming out of the pandemic largely unscathed. According the latest OECD trade report, the G20 international merchandise trade continued to rebound in the fourth quarter of 2020 (exports up 7.2% and imports up 6.8%), following the sharp falls seen in the first half of 2020, as lockdown measures affected trade globally. Although growth in the fourth quarter of 2020 was strong, it, however, shows a reduction compared to the unprecedented expansion observed in the third quarter, when exports and imports increased by 20.6% and 16.8%, respectively.
With the exception of Argentina, hampered by strikes in their wheat export supply chain, all G20 economies experienced international trade growth in the fourth quarter of 2020. In general, quarterly levels of international merchandise trade were somewhat above those in 2019. Limited provisional data available for January 2021 show international trade growth continuing.
A strong driver of 2020 merchandise trade growth in the G20 was China, which already experienced a rebound in the second quarter of 2020 and has seen solid international trade growth continue in the last two quarters of 2020 (exports up 7.0% and 6.1%; and imports up 7.6% and 3.1%, for the third and fourth quarter, respectively). Elsewhere in the Asia-Pacific region, Australia (exports up 11.6% and imports up 7.9%) and Japan (9.7% and 6.5%) saw strong trade growth in the fourth quarter of 2020, while growth in Indonesia (6.2% and 1.7%) and Korea (5.0% and 4.5%) was more moderate.
The EU27 as a whole (exports up 7.7% and imports up 6.4%), as well as France (9.4% and 3.1%), Germany (8.0% and 7.3%) and Italy (8.6% and 7.8%) all recorded strong growth in the fourth quarter of 2020, reinforcing the rebound observed in the third quarter. The United Kingdom recorded double-digit growth in both exports (10.0%) and imports (16.0%) in the fourth quarter of 2020. The strong growth number for imports could be linked to anticipation of the withdrawal from the EU single market and may also have supported the strong export numbers for the G20 EU economies (i.e., France, Germany and Italy).
G20 economies in the Americas also continued to gain ground in the fourth quarter of 2020. Brazil exports were up 2.8%, while imports increased by 25.8% (largely as the result of the purchase of oil extraction equipment). Canada recorded steady international trade growth (exports up 4.8% and imports up 4.7%), while the United States saw stronger growth numbers (8.6% and 6.1%).
According to experts, the world economy could survive the devastations of the pandemic because the rich world had already abandoned the Chicago school of economic thought (market liberalism and fiscal fundamentalism) propounded in mid-1970s by Milton Friedman and replaced it by 2008 with large doses of British economist John Maynard Keynes.
The central tenet of Keynes school of thought is that government intervention can stabilize the economy. The main plank of Keynes’s theory, which has come to bear his name, is the assertion that aggregate demand—measured as the sum of spending by households, businesses, and the government—is the most important driving force in an economy. Keynes further asserted that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists justify government intervention through public policies that aim to achieve full employment and price stability. According to Keynesian economics, state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle.
Keynes argued that governments should solve problems in the short run rather than wait for market forces to fix things over the long run, because, as he wrote, “In the long run, we are all dead.” This does not mean that Keynesians advocate adjusting policies every few months to keep the economy at full employment. In fact, they believe that governments cannot know enough to fine-tune successfully.
The global financial crisis of 2007–08 caused a resurgence in the Keynesian thought. It was the theoretical underpinnings of economic policies in response to the crisis by many governments, including in the United States and the United Kingdom.
Surprisingly, indeed, the IMF, the champion of austerity has been telling policymakers in rich industrial nations lately that they should not fret over much about huge build-ups of public debt during the Covid-19 crisis.
According to Philip Stephens of Financial Times (Why economists kept getting the policies wrong, published on Feb.17, 2021) to be clear, there is nothing irresponsible about the IMF’s advice that policymakers in advanced economies should prioritize a restoration of growth after the deflationary shock of the pandemic.
“The eternal truths amid the missteps and swerves were that public spending and borrowing were bad, tax cuts were good, and market liberalization was the route to sunlit uplands. The abiding sin threaded through it all was that of certitude. Perfectly plausible but untested theories, whether about the money supply, fiscal balances and debt levels, or market risk, were elevated to the level of irrefutable facts. Economics, essentially a faith-based discipline, represented itself as a hard science. The real world was reduced by the 1990s to a set of complex mathematical equations that no one, least of all democratically elected politicians, dared challenge. Thus detached from reality, economic policy swept away the postwar balance between the interests of society and markets. Arid econometrics replaced a measured understanding of political economy. It scarcely mattered that the gains of globalization were scooped up by the super-rich that markets became casinos and that fiscal fundamentalism was widening social divisions. Nothing counted above the equations. And now? After Donald Trump, Brexit and Covid-19, it seems we are back at the beginning. Time to dust off Keynes’s general theory.”
Time now for Pakistan as well to make our official economic planners to dust off their long forgotten lessons of Keynes’ general theory. And in their negotiations with the Fund they should ask the lender of the last resort why public spending and borrowing are not good for countries like Pakistan; why it is no more advising the advanced countries to retrench, go for a smaller state and/or market liberalization while it is continuing to insist borrowers like Pakistan should minimize their public sector and liberalize markets; If public spending, borrowing, no more tax cuts and no further market liberalization was the route to ‘sunlit uplands’ for rich countries why is it not the right route for countries like Pakistan; and why is it looking the other way when these rich countries announce huge stimulating packages but in the case of countries like Pakistan offering such packages to the indigents are strictly discouraged.
It is time, therefore, to review our continued dependence on the IMF for the crucial but elusive bailouts from the perpetual debt and poverty trap. The world has changed drastically over the last decade or so. It is geo-economics not geopolitics that dictates the new world. And knowledge is fast displacing labour as one of the three essential components of production - the other two being capital and energy.
Over the last five years or so the labour cost in China is said to have gone up by five times but since technology has largely automated these formerly labour intensive manufacturing facilities China has retained these facilities rather than being forced to relocate them in neighboring countries like Pakistan where the labour is five times cheaper. And since most of the items in demand in the global export market are knowledge based, countries like Pakistan which are still living in the labour intensive age are likely to suffer badly.
Pakistan will have to find a way to make their exports somehow much more attractive than for example Vietnamese exports or Indonesian exports in order to outcompete them. How is Pakistan going to do this when its human capital level is extremely low and its economy is ridden with structural deficiencies?
And since because of digitalization, automation and Artificial Intelligence the very nature of manufacturing is changing the world over both the value chains and supply chains are also changing in nature. Therefore, unless we get our youth to go through some crash courses in technology and automation via digitalization, we are likely to be left behind on the way side in a matter of couple of years.
We also need a new crop of digital savvy young civil servants well versed in knowledge economy, automation and technology to man the expanded government skillfully and with a high degree of efficiency and competency and with dedication.
One more thing, in the years to come nobody would need to invade a country militarily to subjugate it. Neighboring countries or even those located in far off places with better geo-economic policies can easily and completely undermine sovereignty of countries still living in the 20th century.
Copyright Business Recorder, 2021
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