Economy

Trade wars, currency wars and geopolitical clashes

Published

5 years ago

July 3, 2018

The Chinese yuan has already plummeted to the historic lows of the last seven months as against the dollar and nothing prevents us from thinking that the Chinese government is organizing a real devaluation of the yuan-renmimbi.

In fact, on June 27 last, the Chinese central bank set the parity as against the dollar at 6.596, by also cutting additional 391 points compared to the levels of the previous day.

A move that could largely expand the already significant size of China’s foreign trade, as well as avoid further tension with the USA on trade tariffs, and finally increase and differentiate Chinese exports.

This does not necessarily mean, however, that China really wants to significantly and clearly devalue the yuan. We rather fear that this threat is a sword of Damocles to be placed right on President Trump’s head.

The problem is, above all, of a geopolitical rather than of a financial nature.

As early as the 1990s, the US ruling classeshave ridden their project of globalization, which has inevitably been matched by universal financialization.

On the one hand, this has created a new power – that of the major international regulators (the World Bank, the Basel Bank for International Settlements, the Monetary Fund, etc.), which have largely changed the course of US geo-financial interests since the USSR collapse – while, in the meantime, the advanced technologies have migrated to Asia and partly to the European Union.

Asia is currently a US global competitor, while Europe is now perceived by the United States as a useless buffer vis-à-vis the pan-Russian region and, above all, the pleasant geopolitical region that believes it has a currency, namely the euro, preventing the dollar from fully developing.

By all accounts, on July 15 next, Trump and Putin could just decide to stop the escalation between Russia and the USA, thus together weakening the European region.

The region that has so far followed the new American Cold War blindly and even against its own clear interests.

Hence currently China wants to direct the whole globalization and financialization process of the world economies.

According to China’s decision-makers, the United States can no longer afford it, considering that -based on 2017 data – its trade deficit amounts to 567 billion dollars and its public debt is equal to 21.5 trillion dollars.

It should be recalled that this is the real bone of contention.

Moreover, despite President Trump’s tax reforms, the US companies still have 2.7 billion dollars held in tax havens.

All global tax havens hold 21-35 billion US dollars of private funds. Resolving this tension means becoming global leaders, both financially and industrially.

This holds true also for corruption.

For example, the African nations alone lost at least 1 billion US dollars in 2017 due to the capital flight, while the sum of these African countries’ foreign debt is currently only 200 million dollars.

This year Switzerland ranks first in the list of tax havens, but followed by the United States and the notorious Cayman Islands.

Hence while the capital market is grey and inelastic, as shown by most tax havens, when the public revenue stemming from corporate income decreases, personal income taxes can only increase. This is certainly not a formula for economic development, neither driven by exports nor by other operations.

Not surprisingly, over the last ten years the US public debt has grown at the rate of 1.23 billion dollars, but it has recently doubled, rising from 8.9 trillion dollars in 2007 to 20.1 trillion dollars in December 2017.

Hence, while currently the US globalization trick mainly favours China, military pressure and protectionism are the main and inevitable models of behaviourand protection of the US interests in the world.

Furthermore, protectionism is worth as much as manufacturing, considering that finance is already globalized everywhere: nowadays the US industry, including the energy system, produces only 21% of GDP, while the rest is produced by the service sector.

President Trump’s new proposals, however, i.e. the mix of FED’s “moderate” monetary policy, of trade deficit reduction and of tariff protection through the buy American policy, are worth approximately 1 billion dollars of increase in federal spending, with support to some new infrastructure, but with additional 4.4 trillion dollars relatingto tax reform.

The reduction of personal income and corporate income taxes from 35 to 20% – the focus of President Trump’s new tax policy – as well as the reduction of taxes on repatriated capital and the other corporate tax cuts, are all operations leading to a depreciation of capital income and hence, according to neoclassical models – to a corresponding investment increase which, however, never really materialize.

Therefore President Trump’s tax reform could certainly stimulate domestic demand and hence the GDP growth rate, thus resulting in greater household spending, but above all enabling companies to deduct new investment from taxes until 2022.

However, the amount of recently-issued US debt securities can raise interest rates significantly.

Hence short-term investment expands in the USA, while the market is well aware that, as from 2025, the public deficit and hence interest rates will fall significantly.

There could therefore be the corporations’ temptation to postpone investments for a few years. Nevertheless, in the short term, the tax rebate policy is a drain on public revenues, which are expected to decrease by 11 trillion dollars until 2027.

Corporations can stand it.

Currently the US debt-to-GDP ratio is equal to 105%, but in 2027 it is expected to reach 110% with a foreseen 3-3.5% yearly annual growth rate.

The US Congress calculates that the tax losses caused by President Trump’s reform should be 414 trillion dollars staggered over ten years.

Over the same period, the reduction in revenues is expected to be 1,633 trillion dollars.

Moreover, the increase in direct household income is supposed to be 8%, with a clear increase in taxable income.

Nevertheless, this obviously does not offset the primary decrease in revenues – otherwise we would have discovered the perpetual motion.

Hence US corporations could save 1.2-1.3 trillion dollars, which previously went on taxeswhile, if all goes well, President Trump’s reform could stimulate a further 9% GDP growth in the medium to long-term.

However, the US domestic market’s dependence on foreign markets is very high, even with a population of 320 million inhabitants and a high average consumption rate.

Hence if a policy is implemented to substitute imports from abroad to the USA, where the labour cost and taxes are comparatively higher, this will imply an obvious increase in inflation.

It should be recalled that currently the Russian Federation has already put in place as many as 780 projects of import substitution, while last March Chinese imports rose by 14.4% – a higher rate than expected – but with a corresponding 2.7% yearly fall in Chinese exports denominated in dollars.

For the time being, China aims mainly at import diversion, not so much at import substitution.

As we all know, another piece of President Trump’s tax and economic domino is the dismantling of Obamacare.

A substantial cut would be a dangerous political mistake on such an important issue from an electoral viewpoint.

Probably President Trump’s cuts will be mainly focused on education and research, considering that under President Obama’s Administration the social spending for income support had reached 66% compared to 15% of the previous Presidencies, including the Democratic ones.

The United States is not good at implementing Socialism- this is a specialty of the best Europe, as is also the case with social Catholicism.

The welfare Catholicismwas certainly not born only to take away votes from the Left, but also resulted from a long and elaborate analysis that the Catholic Church made on capitalism, from the French Revolution until the Encyclical Rerum Novarum, with the refined philosophy of Mounier’spersonalism and, in Italy, with the extraordinary season of the Code of Camaldoli.

Within the framework of US typical capitalism, however, high social spending is a danger to the economic system and to domestic financial markets.

The US friends can afford neither democratic Socialism nor the social Catholicism of the Code of Camaldoli.

Furthermore, President Trump’s idea to repeal the Dodd-Frank Act – which, after the 2007-2008 crisis, redesigned the clear separation between investment banks and savings banks, invented by the Fascist legislation on the State holding IRI and later revivedby President Roosevelt in the Glass-Steagall Act of 1933, repealed in 1999 – is not entirely wrong.

If anything, President Trump wants to revive the 1933 Act, with an eye to the new “21st century” Glass-Steagall Act proposed by John McCain and Senator Elizabeth Warren – a new Act specifically banning the current dual role played by banks, both as institutional investors on behalf of corporate clients and as classic collectors of savings from small clients.

President Trump probably agreeswith the lines of a new Glass-Steagall Act that, according to the US President’s economic advisors, should favour the control and management of bank credit and the mass of credit liquidity.

Theringfencecurrently required of US banks is certainly not enough to regulate the cycle, but nowadays it is hard to well define the different types of financial investment.

Moreover, duration is not the only index to assess its dangerousness or not. We will talk about it at a later stage.

It is also worth recalling, however, that private consumption in the USA amounts to 70% of GDP, while the US citizens’ private debts are currently worth as many as 18.94 trillion dollars, equivalent to 96% of current GDP.

Hence either private debts are rescued or also the GDP is jeopardized, with ripple effects which are hard to foresee.

In our opinion, the policy line supported by President Trump, who wants a federal law regulating current and future financial markets, goes in the right direction.

This means that, as already happens, President Trump will do everything to provide stable employment to the Americans (158 million employees) by curbing the foreign manpower whocarries out direct wage dumping against US citizens, thus competing with them at a minimum wage level.

Domestic wage dumping will no longer be allowed in President’s Trump era and investment in manufacturing will be aimed at turning temporary jobs for Americans into stable jobs.

The President wants to do exactly the opposite of what the European Union is doing – and he will succeed.

During President Obama’s Administration, legal and illegal migrants totalled 27 million people.

Hence the three goals of what has been defined as Trumponomics are essentially the expansion of national production; the increase of the US labour market in terms of size and income, as well as the repatriation of the huge amount of US capital held abroad.

Nevertheless, with specific reference to trade regulations, rebalancing the US market is a complex process: in the USA there is no VAT for imported goods, except for a sales tax which, however, is applied only in some States of the Federation.

The solution would be to manipulate taxation on imports in such a way as to remove the difference between the external taxation levels of the various countries exporting to the USA and hence abolish the comparative advantages of the various countries selling in the US market.

Let us now analyse, however, the overall policy line and, above all, the energy tax policy that President Trump wants to implement.

The USA is still the first energy consumer in the world since it uses as much as 25% of all energy produced globally, with a share that is more or less equivalent to the US share of global economy.

The United States currently uses 19.7 million oil barrels a day.

Nowadays, based on March 2018 data, the North American autonomous oil production amounts to 10.4 million barrels a day- a share which, however, is worth only 52% of US consumption.

Nevertheless, it should be recalled that 68% of oil imports into the USA are duty-free.

It is also worth recalling that, based on the most reliable predictions on shale oil and gas, by the end of 2022 the Americans expect to produce two-thirds of their own energy needs autonomously -hence it is extremely probable that NAFTA exporters to the USA, especially Mexico, shall accept an unexpected share of taxation on oil barrels exported to the United States.

This, however, could lead to a price war between NAFTA producers and competitors in the Gulf or other areas.

Obviously the taxes and duties on energy imports would mainly favour the US domestic production, thus allowing the massive internal consumption of US oil and gas and the re-exporting of thetaxed ones coming from the NAFTA regions.

With specific reference to natural gas, the US situation is equally rosy. Since 2009 the United States has gradually become the world’s largest producer of natural gas, with proven reserves in North America equal to Saudi Arabia’s, but 5.5 times less than Russia’s and 3.7 times less than Iran’s.

This will explain many things in the future.

In 2017, the USA produced 73.6 billion cubic feet of natural gas per day, especially in the Appalachian regions, while the North American government agencies expect that gas – as long as it lasts – will not only saturate all domestic consumption, but will also enable the USA to become a net exporter of liquefied petroleum gas (LPG), with facilities in Louisiana and Maryland, which are now on the point of being completed.

This new US presence in the energy sector will be a powerful lever to deal with the new tariff balances from a strong bargaining position.

With specific reference to infrastructure, there is a “Roosevelt-style” plan that, not surprisingly, President Trump is putting in place, by using a bill – originally submitted by the Congress – which provides for investment to the tune of 1.5 trillion dollars to stimulate private individuals and entities to further invest in this sector that is usually unattractive for US capitalists.

Only 200 billion dollars would be direct federal funds, while the remaining 1.3 billion dollars would, in fact, come from private individuals or entities or from States of the Union.

The goal is to modernize the railway network, motorways, airports and sea ports, as well as waterworks and hydroelectric dams.

Additional 50 billion dollars will be allocated to agricultural infrastructure and irrigation.

The States of the Federation will be responsible for the entire infrastructural operation, but we do not see how the necessary external investment can come to the USA – an investment that will be unavoidable, considering the amounts at stake.

Hence, with Trump’s Presidency, the United States will basically tend to become an economic organization virtually impervious to external shocks. It will make all the companies which are essential for both military or economic national security go back into the Federation’s perimeter. It will finally expand the manufacturing sector to the detriment of the service and financial sectors.

Along with these geo-economic prospects, Trump’s Presidency will try to foster peripheral and marginal tensions in the world arena, above all to sell arms and later create the flow of high-tech investments which, as usual, starts from the military sector and then affects also the civilian sector.

Trumponomics has so far worked well and has reached some good results.

In 2017 domestic demand rose by 4.6%, the fastest growth in the last three years.

Consumer spending, which is worth two-thirds of all US domestic trade, grew by 3.8% in late 2017, but families also benefited from the steady increase in stock market indices, as well as from the increase in property and real estate prices and in wages- which is certainly not a negligible fact.

Most of the growth in consumption, however, was directed to imports, which grew by 13.8% in the last quarter of 2017. In terms of balance of payments, this offsets the increase in US exports deriving from the relative weakness of the dollar.

The diversification of the North American economy has increased by 19% and the USA are collectively less dependent on the results of the various productive sectors.

Unemployment is falling also for the “Latinos” and the black people, with the lowest unemployment rate of the last 40 years, as well as the return of Chrysler-FIAT to the USA, for example, through a new factory for 2,500 workers in Michigan, while the opinion polls show that 70% of the US population believe that the economy is “excellent” or good”.

In 35% of cases,temporary jobs are turned into stable jobs -without particular racial differentiation.

According to Moody’s, since 2014 the US economy has produced over 2 million new jobs a year, while the unemployment rate is currently lower than 4%.

Nevertheless, imports obviously continue to be the Achilles’ heel of President Trump’s project.

The more the US economy grows, the more the share of imports increases.

In 2017 the USA imported 2.79 billion dollars of goods and services with a related export share of 2.32 billion dollars alone, resulting in a trade deficit equal to 566 billion dollars.

The imbalance between imports and exports, however, always leads to a 1.13% decrease of GDP.

The sectors that contribute most to this imbalance are the automotive and consumer goods sectors.

In 2017 the USA imported drugs, cars, clothes and other goods to the tune of 602 billion dollars, while it exported 198 billion dollars of consumer goods only.

The United States imported 359 billion cars, but exported only 158 billion ones.

In this sector the real US competitor is still China. In late 2017, however, the USA recorded a 375 billion dollar balance of payments deficit vis-à-vis China; a 71 billion dollar deficit with Mexico and a 69 billion dollar one with Japan, as well as a 65 billion dollardeficit with Germany.

Nevertheless the trade wars – which, as President Trump maintains, are “easy to win” – are not so much so.

The introduction of a single tariff on goods imported from China, as well as a 45% duty – 35% for Mexican goods – would increase the cost of all imports, from any country, by 15%, with a 3% average price increase resulting in a 85 billion fall of US exports compared to the initial data.

Furthermore, the EU could easily increase its duties within two months.

Finally, China could respond by increasing customs rights and duties on as many as 128 types of imports from the USA, in addition to imposing a further 25% duty on cars, aircraft, oil and food from the USA.

In short, for a President very focused on the economy like Donald J. Trump, the prospect of protectionism will be less likely than we can currently anticipate and, however, the slow reconstruction of the US manufacturing and internal market – which are President Trump’s electoral and geopolitical goals – will continue.

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Giancarlo Elia Valori

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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Economy

How getting dollars from IMF, World Bank would make the borrower country’s situation worse off

Published

3 hours ago

June 10, 2023

Zakria Khan

As globalisation and international trade continue to increase, countries are becoming increasingly dependent on one another for economic support. While the idea of receiving financial assistance from other countries may seem beneficial, it is essential to consider the long-term consequences of relying on foreign funding. In this article, we will explore the reasons why obtaining dollars from other countries may not improve a nation’s situation.

One of the major issues with relying on foreign aid is the potential for a cycle of dependency. When a country becomes reliant on external aid, it can lead to a situation where it is unable to sustain its own economy without outside support. This is a dangerous situation because it can create a vicious cycle where the country continually needs more and more aid just to stay afloat.

For example, if a country receives aid in the form of a loan, it will need to repay the loan with interest. This can be difficult if the country is not generating enough revenue to meet its existing financial obligations, like the case with Pakistan where IMF has given $6.52bn as per 2019 according to al Jazeera news.

accepting foreign aid can result in a loss of autonomy for the recipient country. When a country accepts financial aid, it must adhere to the stipulations of the donor country or organization. These stipulations can range from structural adjustments to changes in the recipient country’s policies or systems. These changes may not necessarily align with the values or beliefs of the recipient country and can have unintended consequences.

For instance, a country that accepts aid from another nation may be required to implement specific economic policies to align with the donor’s interests. While the donor may have good intentions, these policies may not be suitable for the recipient country’s unique economic conditions. This loss of autonomy can have significant long-term consequences for a nation’s economic and political stability.

Furthermore, foreign aid can also create an incentive for the recipient country to focus on producing goods that are exportable to the donor country. This focus can lead to the neglect of domestic industries that could potentially contribute to the country’s long-term economic growth.

when a country relies on foreign aid and loans, it can create a cycle of dependency that is hard to break. Instead of developing its own economy, a country that is dependent on foreign aid becomes trapped in a cycle of always needing more aid to survive. This can lead to a lack of innovation and productivity, as well as a lack of incentives for the government to implement necessary economic reforms.

For example, many African countries have been receiving foreign aid for decades, but their economies remain stagnant, and their people continue to live in poverty. The reason for this is that the aid has created a culture of dependency that has prevented these countries from developing their own economies and becoming self-sufficient. As a result, they continue to rely on foreign aid, and the cycle of dependency continues.

Secondly, foreign aid and loans can also lead to the creation of a debt trap. When a country borrows money from other countries or international institutions like the World Bank or IMF, it is required to pay back that money with interest. If the country is unable to pay back the debt, it can become trapped in a debt cycle that can be difficult to break.

For example, many developing countries have borrowed large sums of money from China to fund infrastructure projects like roads and ports. While these projects have helped to improve the country’s infrastructure, they have also left the country with a large debt burden. In some cases, the debt has become so large that the country is unable to pay it back, and it becomes trapped in a debt cycle that can be difficult to break.

As a nation, it is natural to seek foreign investment and aid to support its economic growth and development. However, it is essential to realize that getting dollars from other countries may not always be the best solution to address a country’s economic challenges. In fact, it can lead to plenty of problems that may exacerbate the current situation.

Foreign aid can create a dependency culture, where a country becomes reliant on the help of others to sustain its economy. This often leads to the abandonment of initiatives that would have driven growth in the economy, as it is more comfortable to rely on handouts rather than working towards self-sufficiency. A dependency culture also makes a nation vulnerable to the whims of other countries, who may withdraw their support without warning, leaving the country with a sudden and severe economic downturn.

Another challenge with getting dollars from other countries is the exchange rate risk. When a country borrows money in a foreign currency, it becomes susceptible to fluctuations in the exchange rate. For instance, if a country borrows money in US dollars, and the US dollar appreciates against the local currency, the debt burden becomes more significant, and it becomes harder to pay back. This can create a vicious cycle of borrowing to pay back previous loans, leading to an unsustainable debt situation.

foreign aid and investment can create a situation where the recipient country becomes a dumping ground for substandard goods and services from the donor countries. For example, in Africa, there have been reports of donated clothes from western countries causing local textile industries to collapse, as people prefer the cheap second-hand clothes from the west. This creates a vicious cycle of dependency on foreign goods, leading to the closure of local industries, job losses, and an erosion of local culture.

Another challenge with getting dollars from other countries is that it may lead to the exploitation of natural resources. For instance, foreign investors may demand favorable policies that allow them to extract resources from the host country at minimal cost, leaving the country with minimal benefits. This creates a situation where the host country is merely an exporter of raw materials, and the foreign investors reap the benefits.

Critics argue that the loans provided by the IMF and other entities often comes with strict conditions attached. Such as imposing austerity measures or liberalizing markets.

whether IMF and World Bank lending helps poor countries or not depends on a variety of factors, including the specific terms and conditions of the loans, how the funds are used, and the broader economic and political context in which the lending takes place.

Economy

The Complex Relationship Between Populism and the Economy: A Delicate Balancing Act

Published

10 hours ago

June 10, 2023

Syeda Nida Fatima

Populism on both the right and left has spread like wildfire over the world. The drive reached its apex in the United States with Trump’s election, but it has been a force in Europe since the Great Recession threw the European economy into a lengthy tailspin. Populism is a political philosophy that demonizes economic and political elites while lionizing ‘the people.’ Populists of all shades argue that the people must recapture power from the unaccountable elites who made them impotent.

Populism has emerged as a powerful force in contemporary politics, challenging long-held political norms and institutions. The appeal to economic concerns and complaints is a crucial feature of populist movements. The link between populism and the economy, on the other hand, is intricate and diverse. During periods of economic instability or stagnation, populism frequently arises, tapping on the frustrations and worries of marginalized people. the economic instability refers to an economy that lacks certainty or equilibrium, such as high unemployment rates, poor economic development, or unpredictable financial markets. Populist leaders and groups are skilled at exploiting economic complaints and presenting them as the consequence of an inefficient or corrupt elite. They present themselves as defenders of the “common people” or marginalized groups who have been left behind by the current political and economic elite. They provide simplified solutions to complicated economic problems, vowing to protect people’s interests against perceived dangers presented by global entities such as globalization, immigration, or multinational businesses.

It is crucial to remember that economic insecurity or stagnation does not always result in the emergence of populism. Other variables, such as cultural fears, identity politics, and a lack of faith in institutions, all contribute to the creation of a climate favorable to populist movements. The economic factor, on the other hand, is frequently a substantial motivator since it directly affects people’s livelihoods and ambitions.

Populist policies and language can have serious consequences for economic stability, development, and long-term viability. To understand its implications for society and policymaking, this delicate balancing act between populism and the economy must be carefully examined.

Economic Dissatisfaction and the Rise of Populism

Populist groups frequently garner support by focusing on economic dissatisfaction in society. These complaints may be the result of a variety of issues, including wage stagnation, job insecurity, economic inequality, and the belief that conventional political elites have not effectively addressed these issues. Populist leaders are skilled at capitalizing on these resentments by pledging quick and dramatic fixes that appeal to disenchanted people.

Populist economic policies

Populist economic policies are frequently put in place once populist politicians are in charge in order to solve the issues that brought them to power. These regulations might be very varied from one country to another, reflecting the diversity of populist movements worldwide. Protectionism, trade restrictions, and more government involvement in the economy are some characteristics of populist economic policy. These actions are frequently justified as defending the rights of the “common people” in the face of multinational companies and powerful global elites.

Long-Term Economic Effects and Short-Term Populist Gains:

Populist measures may improve the short term and placate disenchanted people, but they can harm the economy in the long run. For instance, protectionist policies may shelter domestic sectors from competition in the near term, but they eventually stifle effectiveness, innovation, and competitiveness. Increased government involvement may result in corruption, inefficiency, and a suppression of the expansion of the private sector.

The Effects on Investor Confidence and Market Stability

Populist discourse and actions may also significantly affect investor confidence and market stability. Populist politicians frequently take on established financial and economic institutions like central banks, which can increase volatility and uncertainty. When political factors appear to be driving policy decisions rather than strong economic realities, investors may be reluctant to commit capital.

Inclusive growth vs. Protectionism

If it is feasible to achieve inclusive economic development while assuaging populist attitudes, that would be a key question in the populist-economic nexus. Opponents contend that populist policies frequently priorities instant gratification and protectionism, which may eventually impede broad-based prosperity and deepen inequality. For nations battling populism, striking the correct balance between addressing valid economic concerns and pursuing long-term, sustainable economic policy is a vital task.

The Importance of Education and Economic Literacy

A diversified strategy is needed to address the complicated link between populism and the economy. Increasing economic literacy and spreading education on the advantages of free trade, open markets, and globalization might help dispel the oversimplified myths sometimes spread by populist groups. Societies may promote a more educated and nuanced public dialogue by providing people with the means to comprehend and critically analyses economic concerns.

Conclusion

The complex interrelationship between populism and the economy emphasizes the need of having a thorough grasp of the motivations and outcomes of populist movements. Because it plays on the frustrations and worries of marginalized groups who feel left behind by the current political and economic system, populism frequently gains support during periods of economic instability. Populist leaders can appeal to disillusioned people by capitalizing on economic concerns and promising quick, radical answers.

Economic stability, growth, and societal well-being may be significantly impacted in the long run by populist economic policies and rhetoric. While populist initiatives may temporarily alleviate problems and placate irate people, they frequently overlook factors like long-term sustainability, effectiveness, and competitiveness. Economic development, investment, and innovation can be hampered by protectionist trade policies, increasing government interference, and a contempt for economic competence.

In conclusion, it is important to carefully evaluate and take a balanced approach to the topic of populism and the economy. While economic resentments might contribute to the growth of populism, the economic effects of populist measures must be considered over the long run.

Suggestions

A broad strategy that tackles both the underlying economic complaints and supports sustainable economic policies is necessary to handle the complex problems surrounding populism and the economy. Here are some tips for overcoming these obstacles

Addressing Economic Inequality

Governments should implement policies that promote inclusive economic growth and reduce income inequality.

Strengthening Institutions

Upholding the integrity and independence of democratic institutions is crucial in countering populist tendencies. Strong institutions can help rebuild trust and confidence in the political and economic system, mitigating the appeal of populism.

Promoting Dialogue and Engagement

To address the concerns of marginalized groups, it is essential to engage in open and constructive dialogue.

Strengthening Economic Literacy

Enhancing economic literacy among the general population is critical.

Promoting International Cooperation

Global challenges such as climate change, pandemics, and economic interdependence require collaborative solutions. Governments should prioritize international cooperation and engage in constructive dialogue to address these challenges collectively. By demonstrating the benefits of global engagement and cooperation, societies can counter the isolationist and protectionist tendencies often associated with populism.

Societies may overcome the problems presented by populism while supporting sustainable economic development and social cohesion by resolving economic complaints, advocating inclusive policies, and creating a feeling of economic security and opportunity.

Economy

From Bullets to Development: Rethinking Military Expenditure in Favour of Official Development Assistance

Published

3 days ago

June 7, 2023

Rameen Siddiqui

International assistance has achieved remarkable accomplishments in reducing global poverty, supporting girls’ education, addressing hunger, ensuring safe childbirth, nearly eradicating polio, combating female genital mutilation (FGM), providing food rations for Syrian refugees, constructing schools and sanitation facilities in Kenya, and delivering crucial relief supplies to Afghan villagers affected by an earthquake.

However, despite the current combination of global crises, some of the wealthiest nations in the world are planning to significantly reduce their life-saving aid budgets in 2022-23. These decisions are made by political elites who are sheltered within the safety of their privileged positions, yet the consequences of these choices are acutely felt by the most vulnerable individuals across the globe.

Official Development Assistance (ODA) plays a vital role in supporting the development and welfare efforts of low- and middle-income nations. The United Nations has set a target for countries to allocate 0.7% of their Gross National Income (GNI) towards ODA. However, recent estimates indicate that a significant portion of foreign aid is being directed towards Ukraine, accounting for 7.8% of all ODA in 2022. Meanwhile, aid provided to least-developed countries and countries in sub-Saharan Africa has actually decreased. Donors continue to fall short of their targets to contribute at least 0.7% of their GNI to ODA. When considering a long-term perspective, it is evident that aid may still be experiencing a downward trend in comparison to what countries can reasonably afford.

.Despite its importance, the global levels of Official Development Assistance (ODA) have experienced minimal growth in the last ten years. This lack of progress in fulfilling the commitment to increase ODA to 0.7 percent of gross domestic product (GDP) places a burden on low- and middle-income countries. As a result, these nations are compelled to devise alternative development strategies that are less reliant on external aid. This situation presents them with difficult choices regarding the allocation of their scarce domestic resources undermining development in social sectors.

On the contrary, Military expenditure reached record level in the second year of the pandemic and world military spending continued to grow in 2021, reaching an all-time high of $2.1 trillion. This was the seventh consecutive year that spending increased, research published by the Stockholm International Peace Research Institute (SIPRI).

In light of the Monterrey Consensus on Financing for Development adopted in March 2002 and the 2015 Addis Ababa Action Agenda (AAAA), which outlines spending priorities, states are encouraged to set appropriate targets for essential public services like healthcare, education, electricity provision, and sanitation. However that might not be the case. The latest figures from the OECD will provide further support to the argument. Although there was substantial funding for Ukraine in 2022, Official Development Assistance (ODA) to some of the world’s poorest countries experienced a decline.

The data reveals a decrease of approximately 0.7% in bilateral flows to the group of nations categorized as the least developed countries, comprising 46 countries ranging from Afghanistan to Zambia. The total amount of aid provided to these countries amounted to $32 billion. In simpler terms, the data demonstrates that development aid to numerous developing countries actually contracted.

This leads to an abrupt reordering of budget priorities, where military expenditures, and humanitarian aid take precedence, while other critical needs like education and social services are likely to be deprioritized. Meanwhile, the convergence of droughts and conflicts causes immense human suffering and widespread hunger in several nations, and despite the urgent nature of these crises, UN humanitarian appeals for assistance consistently suffer from inadequate funding.

Assistance allocated to Ukraine, as well as any future major crises that require global attention, should be supplementary to the existing humanitarian and development budgets rather than compromising one for the sake of the other.

As we already knew, in 2021 the ODA budget was reduced to 0.5%, a drop of £3bn compared to 2020 to £11.4bn. The starkest impact of these cuts is on “least developed countries” (LDCs). The amount of bilateral ODA going to LDCs dropped by £961m in 2021, a cut of 40% taking it to a total of £1.4bn.

Yoke Ling, the Executive Director of Third World Network, commented that the increasing military expenditure will undoubtedly have a direct influence on various types of spending that developed countries have committed to providing for developing nations. This includes Official Development Assistance (ODA) and climate finance, which are legal obligations under climate treaties.

Furthermore, Yoke Ling highlighted that even prior to the Russian-Ukraine conflict, developed nations had already been reducing their financial support for development. Therefore, it is anticipated that this decline in development financing will further deteriorate in the future.

Given the climate-change-triggered floods in Nigeria and Pakistan, the severe food insecurity affecting millions in Nigeria, Ethiopia, South Sudan, Yemen, Afghanistan, and Somalia, the unfolding humanitarian crisis in Afghanistan resulting in widespread starvation and desperate measures such as selling body parts to provide for families, the ongoing refugee crisis in Syria where millions remain in displacement camps even a decade after the conflict started, and the devastating famine gripping Tigray, advocates concur that there is an urgent need to uphold and potentially enhance international aid more than ever before.

According to a UN report titled “2022 Financing for Sustainable Development Report: Bridging the Finance Divide,” the Official Development Assistance (ODA) experienced a remarkable growth, reaching its highest-ever level of $161.2 billion in 2020. However, despite this record growth, the report highlights that 13 countries reduced their ODA contributions, and the overall amount remains insufficient to meet the significant needs of developing countries.

The UN expresses concern that the crisis in Ukraine, coupled with increased spending on refugees in Europe, may result in reductions in aid provided to the poorest nations. The majority of developing countries require urgent and proactive support to get back on track towards achieving the Sustainable Development Goals (SDGs).

According to the report’s estimates, a 20 percent increase in spending will be necessary in key sectors within the poorest countries.

If certain developed nations allocate generous resources to military expenditures while simultaneously reducing funding for other aid programs, are they implying that security interests take precedence over long-term public needs? Without question, the rights and necessities of people in Ukraine, Asia, and the rest of the Global South should be prioritized over military spending. Moreover, apart from the conflict in Ukraine, developed countries have already failed to fulfil their commitment of providing $100 billion of climate finance by the year 2020.

By compromising development aid budgets and climate finance, the consequences of poverty, inequalities, adverse climate impacts, and exclusion in the global South will be exacerbated. Such a lack of ambition risks reinforcing the economic and political grievances that lie at the core of armed conflicts in various regions, including Asia.

In order to uphold solidarity and justice, there is a pressing need for synergized political will and ambition.

We should challenge developed countries to honour their existing aid commitments, which include allocating a minimum of 0.7% of their Gross National Income (GNI) as Official Development Assistance (ODA). Additionally, we also call upon them to provide new funding to address the needs of the people in Ukraine. It is imperative to identify new avenues for grants-based climate finance to compensate those most affected by climate change, including communities experiencing losses and damages.

The UN report on Financing for Sustainable Development also highlights the stark contrast between rich countries, which were able to support their pandemic recovery through substantial borrowing at very low interest rates, and the poorest nations that had to allocate billions of dollars to service their debts, hindering their ability to invest in sustainable development.

As we approach the midpoint of funding the Global Sustainable Development Goals, the discoveries are deeply concerning. We cannot afford to be inactive during this critical moment of shared responsibility, where our aim is to uplift hundreds of millions of individuals out of hunger and poverty. It is indispensable that we prioritize investments in equitable access to decent and environmentally friendly employment, social protection, healthcare, and education, leaving no one behind.