Strategy Note / Global

The return of pro-globalisation politics post-coronavirus?

  • The global response to the coronavirus crisis has been uncoordinated, late and incomplete, with potentially catastrophic
  • Will this mark a peak for de-globalisation populist politics (eg anti free-trade and immigration policies)...
  • ...And act as a catalyst for a rebuild of global organisation and coordination of economic and security policies?
  • The global response to the coronavirus crisis has been uncoordinated, late and incomplete, with potentially catastrophic results in terms of deaths and economic disruption.
  • Will this mark a peak for de-globalisation populist politics (eg anti-free trade and immigration policies, waning support for global governance bodies and fora) and act as a catalyst for a rebuild of global organisation and coordination of economic and security policies?
  • Three examples of how such a shift back to globalisation may begin are the following: 
    1. Poor handling of the crisis in the US could pose an unforeseen challenge to the re-election of US President Trump and the anti-globalisation foreign policy he has championed; 
    2. Iran has already made a request for emergency funding from the IMF and any (geopolitically tinged) reticence by IMF Board members in responding positively may prompt Iran to soften the foreign policies that have led to its ostracisation; and 
    3. Global bodies like the IMF and the WHO are again coming to the fore as necessary parts of a solution to a global crisis.

The world’s health-care and economic policy response to coronavirus has been uncoordinated, late and incomplete. Once (hopefully not if) the disruption from coronavirus fades will it mark the peak for de-globalisation politics and a return to support for international institutions that can manage policy coordination but come at a cost of ceding sovereignty? Or, alternatively, will this episode reinforce all the fears about globalisation, including trade and migration, exploited successfully by populist politicians, and lead to more permanent isolationism? The more severe the disruption from coronavirus, the more likely globalisation stages a comeback.

The answer matters not only for global economic growth but also how future universal threats (the next flash event like a virus, regional war or natural disaster, or existing long-gestation risks like climate change or extreme economic inequality). 

Globalisation also matters for smaller emerging and frontier markets, which generally benefit from a shift to more globalisation (eg greater trade, tourism, remittances, capital flows) more than they suffer (greater vulnerability to hot capital flows, trade sanctions, local high-net-worth capital flight, competition for indigenous sectors and higher cost of compliance with global standards).

We have written in the past about the growth of China as an alternative source of trade and finance in emerging and frontier markets, the US-China trade war, the withdrawal from global coordinating bodies by the US under President Trump, the decline in what has been called (flatteringly) the international liberal order or 'westlessness', the growth of conflict (both military and commodity wars) in the geopolitical space vacated by the erosion of the singular superpower, the universality of the coronavirus threat (there is no hiding place for citizens or investors), and the incomplete coordination of the economic policy response. 

Will the next global trend we discuss be one of greater integration and coordination?

Related reading

Coronavirus – The international policy response, 5 March 2020

Coronavirus: Should it be ignored because it is such an unquantifiable risk?, 25 February 2020

Coronavirus: Commodity prices hit as fears grow more global, 3 February 2020

Coronavirus: UAE case a warning for global tourism, 29 January 2020

Oil war: Saudi, Russia can sustain a long war, but a 35% price drop shortens it, 9 March 2020

EM Wars: The changing art and risk of war in Emerging and Frontier markets, 6 March 2020

'Westlessness': What it means for investors in EM and FM, 17 February 2020

Turkey: Inevitable escalation with Russia-Syria, negative, 28 February 2020

Nigeria: Sahel West Africa violence, minor risk compared with others, 3 March 2020

2020s Vision: Technology disruption and the emerging markets, 5 December 2019

Aramco attack: Saudi, oil and regional insecurity risks raised, 15 September 2019

India, Pakistan: "Air strike" raises tensions, NOT likelihood of hot military conflict, 26 February 2019

Trump impeachment: What it means for Emerging Markets, 19 December 2019

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Macro Analysis / Global

Climate change merits a fiscal response like COVID-19’s

24 June 2020

The COVID-19 experience illustrates the failure of markets in preventing pandemics and the potential of public expenditures on a global scale to eventually spur a response. In a similar vein, the world’s top carbon emitters, China, the United States, India, Russia, and Japan—responsible for a combined 60 percent of global effluents (Table 1)—have done little to avert a climate catastrophe, and they must now lead a global fiscal stimulus tackle the problem. A big difference from the COVID-19 experience: Climate spending is not just to put money in people’s pockets, but to promote low-carbon economic growth.

Table 1. Top carbon emitters

Country 2018 CO2 Emissions Global share Change since Kyoto Protocol
China 9.43 27.80% 54.60%
U.S. 5.15 15.20% -12.10%
India 2.48 7.30% 105.80%
Russia 1.55 4.60% 5.70%
Japan 1.15 3.40% -10.10%
Germany 0.30 2.10% -11.70%
South Korea 0.70 2.10% 34.10%
Iran 0.66 1.90% 57.70%
Saudi Arabia 0.57 1.70% 59.90%
Canada 0.55 1.60% 1.60%

Source: Forbes
Note: Emissions in billion metric tons.

The invisible hand, if not a guiding hand, of the government usually suffices to avert problems in well-functioning markets. But with the extreme failure of markets and massive spillover of damages from economic activities causing global warming, solutions call for a stronger hand of government, much as in the case of COVID-19.

The economic rationale for a well-implemented climate stimulus is fourfold:

  1. This is a time to build on the cleaner air that the pandemic has left. In the wake of COVID-19, cities around the world have seen sharp improvements in air quality. In the month after the March 25 lockdown, Delhi’s particulate pollution, emanating from vehicles, factories, and construction, fell by 60 percent. Nitrogen dioxide, linked to vehicles, fell sharply in Wuhan, China during February following the transport shutdown. But carbon dioxide, the chief culprit in global warming, was a record 416.2 parts per million in April 2020 because of past accumulation.
  2. Global climate action does not have to come at the expense of sustained economic growth. In fact, lack of action most certainly will block growth. A climate stimulus will not add to the economic turmoil from COVID-19 because decarbonization does not call for curtailing economic activity. Rather, the way forward is to reduce carbon intensive-energy—renewables are now a competitive alternative—and to expand pollution-control technologies, all at a fraction of the cost of limiting economic activity.
  3. Climate mitigation is an investment to avoid massive damages and sustain economic growth. The benefits of implementing the Paris Agreement on climate change far outweigh its costs. The capital investment required to replace fossil fuels by renewables to keep global temperature rise below the dangerous threshold of 1.5 degrees centigrade is $2.4 trillion a year through 2035. By one estimate, averted global indemnities could be $150 trillion to $792 trillion by 2100, or upwards of four times the investment. Health benefits alone could exceed investment costs 1.5-2.5 times.
  4. Some are already seeing COVID-19’s stimulus packages as an opportunity to spur green growth. The United Kingdom plans to spend 250 million pounds of its stimulus package on walking and cycling infrastructure. Ten European Union nations have called for using recovery packages to support the European Green Deal for climate neutrality by 2050. As part of a green recovery, Tasmania has targeted 200 percent clean energy, including energy exports, by 2040. C40 Cities, a network of 96 cities—representing one-quarter of the global economy—have pledged environmental sustainability in COVID-19 recovery.

While the case for climate action now is loud and clear, the challenge remains intimidating. For global temperatures not to exceed 1.5 degrees centigrade, carbon emissions need to be cut by 7.6 percent yearly, which would bring down emissions in carbon equivalence to 25 gigatons by 2030. This would be sharply different from the current trends (Table 2), which in the best case of following the current pledges shows a level well above 25 gigatons in 2030 and temperatures accordingly headed well above the 1.5 degrees centigrade threshold.

Table 2. Trends in global emissions

Table 2. Trends in global emissions

Source: BBC

So, to make a difference, sizable resources need to be committed for low-carbon activities, even at the expense of less critical objectives. In principal, this would seem doable with the perspective of the COVID-19 action. Compared to the $2.4 trillion per year cost of carbon transition, the group of the largest 20 economies committed $5 trillion in 2020 for the pandemic stimulus packages.

The clearest trade-off to be made in spending would be eliminating the subsidies for fossil fuels. Globally, coal, oil, and gas get nearly $400 billion yearly in subsidies, which balloons, by one estimate, to $5.2 trillion (in 2017) in total costs when the environmental and health damages are accounted for. On the other hand, there is a justification on social welfare grounds for incentives to be given for renewable energy.

The biggest carbon emitters, like the United States and India, are also at the high end of countries most damaged by climate impacts. Therefore, the socioeconomic rationale for them to lead a fiscal action plan to transition to low-carbon growth is clear. What’s needed is for the leadership in these countries to muster the political will to choose a low-carbon growth path.

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Strategy Note / Global

Kuwait, GCC: The expat debate stirs again

  • The high share of expatriate residents has long been a populist political issue in the GCC, particularly in Kuwait
  • This debate may be reigniting in Kuwait with Covid-19 and potential stress on public healthcare acting as a catalyst
  • Expats key for GCC non-oil private sector (skills, scale); GCC key for remittance recipients, eg Egypt, Jordan, Pakistan
Hasnain Malik @
Tellimer Research
15 April 2020

The crisis brought about by the combination of Covid-19 and sustained low prices will test many aspects of the social, political, and economic equilibrium in the GCC. The role of expats could be one such aspect. 

Any deterioration in the environment for GCC expats would be negative for the investment case and for some of the countries from which those expats originate. Equally, those GCC countries which use the crisis to improve the incentives for long-term residency and investment by expats could emerge competitively stronger.

Expatriate residents in the GCC remain key for efforts to diversify economic activity away from hydrocarbons and shrink the role of the public sector. 

In reverse, remittance flows out of the GCC are a material share of GDP (2% to 8%) in a range of recipient countries, eg Bangladesh, Egypt, Jordan, India, Lebanon, Pakistan, Philippines.

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Macro Analysis / Global

Comparing fiscal responses during the coronavirus pandemic and global recession

  • As countries begin to ease their lockdown restrictions, investor attention will focus on economic recovery
  • The global monetary response has been fairly uniform, but the fiscal response has been more uneven
  • For frontiers and smaller EMs, it has averaged 2.7% of GDP, compared with 5% for bigger EM and over 20% in the G7
Stuart Culverhouse @
Tellimer Research
13 May 2020

Countries are beginning to ease their lockdown restrictions – by our count, over 40% (c85) have announced some form of lockdown-easing measures in recent weeks, including the UK at the weekend; although a proper cross-country comparison is made difficult as measures vary by country (and it depends on how strict policies were in the first place). Investor attention will now begin to focus more on the prospects for an economic recovery, and its speed and trajectory  will it be V-, U- or even L-shaped? 

This recovery will depend on numerous factors, of course, but some of the most important drivers are the various stimulus measures that governments and central banks around the world have taken. The global monetary policy response has been largely uniform, across both developed and emerging markets, with many central banks easing in various guises, but fiscal measures have been much more uneven. 

These fiscal responses cover many areas, seeking to limit the extent of the downturn, targeting health spending, protecting the most vulnerable, businesses and workers, and providing the conditions for a rapid return of activity when countries emerge from hibernation (or suspended animation – the chart below shows the remarkable collapse in economic activity) when conditions allow. 

Figure 1: Real activity index* (% yoy) 

Source: Tellimer Research. *Brookings-FT TIGER series. 

In the full version of this report(for Tellimer Insights Pro subscribers), we show the variation in fiscal responses across the globe, based on information from the IMF's policy tracker, which reports the measures taken by 192 countries (or the individual country reports where necessary)  from this, we calculate each country's fiscal response based on announced measures, with the caveat that we do not yet know much about implementation or take-up of many of these measures and whether costs will turn out to be more or less than expected.

Market conditions have stabilised in recent weeks, in part based on these global policy measures, as evident among EMs from declining bond spreads (the EMBIGD spread is down by c20% from its peak on 23 March), an easing in capital outflows (or even the return of some inflows) and the opening of the new issue market (albeit mainly for high grade). But how this continues will depend in large part on the success of the measures these countries have taken to date. 

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Macro Analysis / Global

How the pandemic should shake up economics

22 June 2020

The COVID-19 pandemic has caused massive disruptions to markets, supply chains, and world trade. This has forced a reckoning with many traditional policies and should be treated as an opportunity to rethink some of the ideas that economists have long taken for granted—including the basic notion of what makes an economy function efficiently.

That notion goes back to 1776, a landmark year during which Adam Smith published “The Wealth of Nations,” America’s 13 states declared independence, and the same day, July 4, the philosopher David Hume held a dinner party for his friends, including Smith, to mark the twilight of his life.

Smith’s pathbreaking work, along with later highly influential contributions by Léon Walras, Stanley Jevons, and Alfred Marshall, transformed economics. We learned that markets can function smoothly without a central authority, because the actions of ordinary people trying to earn more and purchase the goods they want create tugs and pulls of demand and supply, causing prices to rise and fall.

As this idea became formalized, the social norms and customs on which markets also depend became part of the woodwork—tacit assumptions that we ignored, because they are so unchanging in normal times, and then forgot were there.

But a disruption such as the one caused by COVID-19 reminds us how much we take for granted. I realized this during the nearly three months I spent in Mumbai during the lockdown, when family and friends told me of conflicts, showdowns, and frayed nerves in the city.

Whereas some residents were castigated for not wearing face masks or for violating social-distancing norms, others were criticized for overdoing the lockdown. Some residents’ associations photographed anyone who stepped out of their home, even if they were alone and far away from anyone else, arguing that such behavior was irresponsible. Because the behavioral requirements brought about by the pandemic are novel and have yet to stabilize, we are more aware of them than we are of longer-established social norms.

Markets also rely on such norms, most of which, having evolved over time and become routine, lie beyond economists’ explicit assumptions. As Karl Polanyi, Mark Granovetter, and others have argued, the economy cannot be understood as though it stands apart from society. Certain social and institutional preconditions must be present for an economy to function effectively. But the economics profession widely overlooked these important reminders, or, at best, put them aside with a nod.

In my book “Beyond the Invisible Hand,” I argued that trade and exchange depend not only on technical assumptions of which all economists are aware, such as the law of diminishing marginal utility, but also on other conditions that we take for granted. These include being able to trust one another and our ability to communicate, which allows us to negotiate and conclude deals. But no economist writes down “can talk” as an assumption. It is regarded as a given.

Unfortunately, this approach has led to big gaps in our understanding of how the invisible hand works. Many conservative economists stress that as long as governments do not intervene and curb individual freedoms, economies will function efficiently. The invisible hand will do it all. But they forget that efficiency also requires many curbs on how we behave, such as not punching other traders in the face and running away with their goods.

This oversight has in turn led to major policymaking mistakes, such as the “Washington Consensus,” which advocated curbing government intervention in the economy and tightly controlling fiscal deficits. As Joseph Stiglitz has pointed out, this so-called Washington consensus was in fact confined to the area between Washington’s 15th and 19th Streets, where the U.S. Department of the Treasury, the International Monetary Fund, and the World Bank are housed. Nonetheless, this new orthodoxy was then thrust upon all developing economies, regardless of whether they met the social and institutional conditions these policies require. Not surprisingly, the measures often backfired.

Fortunately, there is now a growing recognition that price adjustments are not the sole or even the necessary factors that help markets to clear. In a recent paper, Michael Richter and Ariel Rubinstein show that markets can clear in different ways, some of which rely entirely on social norms. In most households, even large ones, the refrigerator is left open and its contents do not have prices marked. But the refrigerator does not get drained within moments of being stocked. Many kinds of behavior are socially forbidden, and in some societies these prohibitions have become so deeply embedded psychologically that no outside authority is needed to enforce them.

This opens up a potentially large research agenda regarding the norms we should encourage to make economies more equitable and productive. The COVID-19 pandemic, by making the tacit overt, has raised awareness of this challenge—and interesting findings are beginning to appear. In a recent paper, for example, Wooyoung Lim and Pengfei Zhang use laboratory experiments to show how pro-vaccination behavioral norms can arise voluntarily, potentially helping populations to achieve herd immunity.

But not all good norms arise voluntarily; nor do societies have to wait for the slow process of evolution to unfold before converging on them. Instead, contemporary research should enable us to isolate desirable norms that we can then consciously try to nurture.

For example, we have now learned that during pandemics, we should stay six feet (two meters) from others and wear face masks. This did not happen voluntarily, or because those who did not follow these norms died, but because research by epidemiologists taught us these norms, and governments enforced or encouraged adherence to them. One hopes that the disruption caused by COVID-19 will likewise spur economists to identify norms that can help us build a more equitable, prosperous, and sustainable world.

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Strategy Note / Vietnam

Vietnam: Let's talk about sex (and population aging)

  • While the world worries about deaths, Vietnam is also focusing on births to address population aging risk
  • Vietnam's population has started ageing at a lower income level than seen in East Asia peers
  • New policies this week aim to increase the low fertility rate (slow the increase in old age dependency)
Hasnain Malik @
Tellimer Research
6 May 2020

While the world is fixated with reducing the economic disruption and deaths from the pandemic, Vietnam has lifted its lock-down, registered no deaths and is tinkering with public policies to promote more births. Perhaps nothing so exemplifies Vietnam's position as one of the most dynamic countries in emerging markets.

In Vietnam, the old age dependency ratio (the number of people aged over 60 divided by the number of people between 15-59) is expected to double in the next 25 years, according to UN projections. Vietnam's working age population likely peaks later this decade at much lower GDP per capita levels than seen in East Asia peers.

This makes for a very attractive consumer market right now (with so much of the population in their best earning years), but it stores up problems down the line. Ultimately, the supply of productive labour slows (which drives wage inflation), and the fiscal costs of public health care and pensions (coverage is merely 20% of the formal labour force currently and, for most retirees, public pension benefits start after the age of 80, according to the World Bank) accelerate. 

The two main policy tools to change this demographic trajectory are to raise the retirement ages and to encourage higher fertility rates.

In November 2019, a timetable for retirement age increases was brought into law: on a gradual basis over 2021-28, the retirement age would increase to 62 from 60 for men, and to 60 from 55 for women. 

This week, Vietnam Prime Minister Nguyen Xuan Phuc introduced the following measures under the 2030 national population strategy:

  1. Target fertility rate increase by 10 percentage points in areas where couples average less than two children (there is substantial regional variation around the target nationwide average of 2.2 children per woman of reproductive age, with around a 40% lower figure in Ho Chi Minh City  a city where the population is growing relatively fast and is a recipient of migrants, mainly female, from rural areas);
  2. Income tax cuts, and subsidies for education and housing for couples with two children;
  3. Marriage and family consultation services (eg match-making clubs) piloted by local authorities;
  4. Health-care and malnutrition consultation services for pregnant women.

In what remains a positive top-down view of the Vietnam investment case, we have highlighted, in previous reports, rapid population aging as being among other noteworthy risks (eg low foreign ownership room in equities, sluggish state-owned enterprise reform and light capital buffers in the banking system). 

Related reading

Vietnam: Still high growth, low accessibility, 11 April 2019

Vietnam: Flows and fundamentals invalidate our caution, 19 March 2018

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