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.
Eurasian integration: From economics to creation of a center of power
Russia’s President Vladimir Putin had every reason to congratulate his
Armenian colleague Nikol Pashinyan with the outcome of the summit of Eurasian
Economic Union (EAEU) leaders that was recently held in Yerevan, where many
promising decisions were made, bringing Iran, Singapore and Uzbekistan closer
to this international organization.
Creation of various economic associations amid the ongoing process of globalization and toughening competition is a global trend nowadays. And still, the reasons for this process in Eurasia are as much economic, as they are existential.
The “traitorous” decision by the Western Christian powers during the Crimean War to side with the Ottoman Empire, which was widely perceived as a force hostile to the Christian world, came as a shock for Russian society, and above all, for the elite of the Russian Empire, which, throughout the 18th and 19th centuries, had been working hard to expand “the window on Europe,” opened by Peter the Great. The Europeans’ deep-seated rejection of Russia as part of the European world, often spilled out into open hostility.
The Crimean War underscored Christendom’s split along ideological and political lines, which began with the separation of the Roman Catholic and Orthodox Churches in 1054. The rapprochement between Russia and the European powers during and immediately after the Napoleonic wars proved a rather short-lived (and atypical) episode in the history of East-West relations. Before very long, however, Russian society managed to develop an “antidote” that cured the psychological trauma caused by the war: “Russia has only two allies: its army and Navy,” as Emperor Alexander III famously said. Moreover, the complex of “otherness” vis-a-vis Europe quickly turned into a matter of pride for many Russian thinkers, such as Nikolai Danilevsky (“Russia and Europe”), Leo Tolstoy (“War and Peace”), Alexander Blok (“Scythians”), to name just a few.
While Danilevsky presented Russia as the leader of the still emerging Slavic “cultural-historical type,” the classical “Eurasians” with their idea of “Russia-Eurasia” believed that the cultural code of the Russian people is closer to the Turkic than to the West-Slavic one. What the “Eurasians” failed to delve into, however, was religious difference between the Russian and Turkic peoples, most of the latter being Muslims.
The ambitious experiment of building communism on a planetary scale further alienated Russia from the West, but brought it closer to the countries of the “third world,” primarily those in Asia. During the 1990s, Russia once again reached out to the West, only to be cold-shouldered by it.
This is exactly the response the West gave Turkey at the turn of this century and, just like the Russians before them, the Turks transformed their own complex of rejection from the West into a matter of pride. Today, according to various polls, up to 94.5 percent of Turks view the United States a hostile country. Anti-Americanism (coupled with anti-Western sentiment) is similarly on the rise in much of the Eurasian continent – from China all the way to the Middle East.
Meanwhile, the “Eurasians” theorized about a fundamental idea the entire future of “Russia-Eurasia” was to be built on. Today, most of the Eurasian countries’ foreign policy paradigm is overshadowed by their postcolonial syndrome and their desire for a more equitable world economic order.
“The recurrence of arrogant neo-colonial approaches, where some countries have the right to impose their will on others, is rejected by an absolute majority of members of the world community,” who seek “a more meaningful role in taking key decisions,” Russian Foreign Minister Sergei Lavrov wrote in an article titled “The world at a crossroads, and the system of international relations of the future.”
This goal can only be achieved by joint efforts and closer integration in the Eurasian space, where complex supranational integration formats, such as ASEAN, SCO, the Customs Union and the Common economic space (Russia, Belarus, Armenia, Kyrgyzstan and Kazakhstan) are already being established. Despite the complexity of the search for a mutually acceptable combination of the interests of very dissimilar countries (unlike in the case of the European Union), which have different civilizational affiliations and some even have running conflicts, this process is still moving ahead.
And yet, despite all their specific features, these countries still have very much in common: as a rule, a powerful state (“public”) economic sector, a long tradition of statehood (unlike Europe, not necessarily national) and, as a consequence, a traditional view of state power as something bordering on sacrosanct. And also an inherent rejection of the Western worldview with its mass culture, “rational,” almost materialistic, religion, and the substitution of morality by the criminal code, as the harshest critics of the West claim. Comparing Russia and Europe, the Russian historian Mstislav Shakhmatov stated: “The state of truth and the state of law are two different worldviews: the former is characterized by religious pathos and the latter – by material aspirations (…). Almost a century later, this maxim still rings true with many Eurasian societies.
Integration in our pragmatic century should start with a search for shared economic interests (by the way, the European Union grew out of the European coal and steel association). Speaking at the 2016 international economic forum in St. Petersburg, President Vladimir Putin pitched the idea of creating a large Eurasian partnership which, besides the CIS countries, would also bring on board China, India, Pakistan, Iran, and other countries.
Russia, which is a melting pot of a plethora of ethnic groups and cultures, has every reason to claim the role of a “natural” driving force behind the process of Eurasian integration. According to Turkish political analyst Ferhan Bayir, today “even the ruling Justice and Development Party in Turkey, which is rooted in political Islam, is edging closer to Russia as it increasingly opposes the United States… Even more so Iran, which is not just getting closer to Russia, but is actually working together with it in many parts of the region.”
Europe became a self-sufficient (though flagging) power center even before it united politically, and Eurasia may well become another such center. Since political unity, including in future, is unlikely, the participants of this integration process could still learn how best to respond together to external challenges, just like Russia, Turkey and Iran managed to collaborate in the Syrian conflict.
It would certainly be great if all countries of the continent (like just anyone else too) could learn to be friends and work together, but awareness of common interests (and, in the era of globalization, of destinies too), can hardly extend to all of Eurasia. Therefore, when we talk about the hypothetical Eurasian community as a center of power, we would have to exclude China, which itself is a power center and the core of a separate civilization. As for India, it will hardly show much interest in close integration as Hindustani civilization is a vivid example of an introverted and self-contained one.
Putting aside the term “center of power,” creating a community of countries with shared economic interests in Eurasia is quite possible. This project will not be hampered by any political incumbrancers, if only its participants agree to find compromises as they go. It won’t be easy, but, as they say, a journey of a thousand miles begins with a single step…
From our partner International Affairs
The $10 Trillion Question: How to End a Lost Decade of Global Productivity
Ten years on from the global financial crisis, the global economy remains locked in a cycle of low or flat productivity growth despite the injection of more than $10 trillion by central banks. While these unprecedented measures were successful in averting a deeper recession, they are not enough on their own to catalyse the allocation of resources towards productivity-enhancing investments in the private and public sectors. The Global Competitiveness Report 2019, published today, points to the path forward.
Launched in 1979, the report provides an annual assessment of the drivers of productivity and long-term economic growth. The assessment is based on the Global Competitiveness Index (GCI), which maps the competitiveness landscape of 141 economies through 103 indicators organized into 12 pillars. These pillars are: Institutions, Infrastructure; ICT adoption; Macroeconomic stability; Health; Skills; Product market; Labour market; Financial system; Market size; Business dynamism; and Innovation capability. For each indicator, the index uses a scale from 0 to 100 and the final score shows how close an economy is to the ideal state or “frontier” of competitiveness.
This year, the report finds that, as monetary policies begin to run out of steam, it is crucial for economies to boost research and development, enhance the skills base of the current and future workforce, develop new infrastructure and integrate new technologies, among other measures.
With a score of 84.8 (+1.3), Singapore is the world’s most competitive economy in 2019. The United States remains the most competitive large economy in the world, coming in at second place. Hong Kong SAR (3rd), Netherlands (4th) and Switzerland (5th) round up the top five. The average across the 141 economies covered is 61 points, almost 40 points to the frontier. This global competitiveness gap is of even more concern as the global economy faces the prospect of a downturn. The changing geopolitical context and rising trade tensions are fuelling uncertainty and could precipitate a slowdown. However, some of this year’s better performers in the GCI appear to be benefiting from the trade feud through trade diversion, including Singapore (1st) and Viet Nam (67th), the most improved country in this year’s index.
“The Global Competitiveness Index 4.0 provides a compass for thriving in the new economy where innovation becomes the key factor of competitiveness. The report shows that those countries which integrate into their economic policies an emphasis on infrastructure, skills, research and development and support those left behind are more successful compared to those that focus only on traditional factors of growth.” said Klaus Schwab, Founder and Executive Chairman of the World Economic Forum.
The report documents emerging areas of promising policies, reforms and incentives to build more sustainable and inclusive economies. To manage the transition to a greener economy, the report recommends four key areas of action: engage in openness and international collaboration, update carbon taxes and subsidies, create incentives for R&D, and implement green public procurement. To foster shared prosperity, the Report recommends four additional areas of action: increase equality of opportunity, foster fair competition, update tax systems and their composition as well as social protection measures, and foster competitiveness-enhancing investments.
Global trends and highlights
In addition to providing an annual assessment of economies’ long-term health, the report also highlights five trends in the global economy and their implications for economic policymakers
The last ten years saw global leaders take rapid action to mitigate the worst of the financial crisis: but this alone has not been enough to boost productivity growth.
With monetary policy running out of steam, policymakers must revisit and expand their toolkit to include a range of fiscal policy tools, reforms and public incentives
ICT adoption and promoting technology integration is important but policymakers must in parallel invest in developing skills if they want to provide opportunity for all in the era of the Fourth Industrial Revolution.
Competitiveness is still key for improving living standards, but policymakers must look at the speed, direction and quality of growth together at the dawn of the 2020s.
It is possible for an economy to be growing, inclusive and environmentally sustainable – but more visionary leadership is needed to place all economies on such a win-win-win trajectory.
The report’s data also shows growing inequalities in the global economy.
Market concentration: The report finds that business leaders in the United States, China, Germany, France and the United Kingdom believe that market power for leading firms has intensified over the past 10 years.
Skills gap: Only the United States among G7 economies features in the top 10 on the ease of finding skilled employees. It is, in fact, the best economy in the world in this category. Of the others, the United Kingdom comes next (12th) followed by Germany (19th), Canada (20th), France (41st), Japan (54th) and Italy (63rd). China comes 40th.
Technology governance: Asked how the legal frameworks in their country are adapting to digital business models, only four G20 economies make it into the top twenty. These are; the United States (1st), Germany (9th), Saudi Arabia (11th) and the United Kingdom(15th). China comes 24th in this category.
“What is of greatest concern today is the reduced ability of governments and central banks to use monetary policy to stimulate economic growth. This makes it all the more important that competitiveness-enhancing polices are adopted that are able to boost productivity, encourage social mobility and reduce income inequality,” said Saadia Zahidi, Head of the Centre for the New Economy and Society at the World Economic Forum.
Regional and country highlights
G20 economies in the top 10 include the United States (2nd), Japan (6th), Germany (7th) and the United Kingdom (9th) while Argentina (83rd, down two places) is the lowest ranked among G20 countries.
The United States (2nd overall) is the leader in Europe and North America. The United States remains an innovation powerhouse, ranking 1st on the Business dynamism pillar and 2nd on Innovation capability. It is followed by the Netherlands (4th), Switzerland (5th), Germany (7th), Sweden (8th), the United Kingdom (9th) and Denmark (10th). Among other large economies in the region, Canada is 14th, France 15th, Spain 23rd and Italy 30th. The most improved country is Croatia (63rd).
The presence of many competitive countries in East Asia and the Pacific makes this region the most competitive in the world, followed closely by Europe and North America. In Asia Pacific,Singapore leads the regional and the global ranking thanks to a top-10 performance in seven of the 12 GCI pillars, including Infrastructure (95.4), Health (100), Labour market (81.2), Financial system (91.3), quality of public institutions (80.4) and it takes advantage of being the most open economy in the world. It is followed by Hong Kong SAR (3rd), Japan (6th), and Korea (13th). China is 28th (the highest ranked among the BRICS) while the most improved country in the region this year (Viet Nam) is 67th. The ranking reveals how heterogenous the regional competitiveness landscape is. Although the region is home to some of the most technologically advanced economies in the world, the average scores of the innovative capability (54.0) and business dynamism (66.1) are relatively low, lagging behind Europe and North America.
In Latin America and the Caribbean, Chile (70.5, 33rd) is the most competitive economy thanks to a stable macroeconomic context (1st, with 32 other economies) and open markets (68.0, 10th). It is followed by Mexico (48th), Uruguay (54th), and Colombia (57th). Brazil, despite being the most improved economy in the region is 71st; while Venezuela (133rd, down six places) and Haiti (138th) close the regional ranking. The region has made important improvements in many areas, yet it still lags behind in terms of institutional quality (the average regional score is 47.1) and innovation capability (34.3), the two lowest regional performances.
In the Middle East and North Africa, Israel (20th) and the United Arab Emirates (25th) lead the regional ranking, followed by Qatar (29th) and Saudi Arabia (36th); Kuwait is the most improved in the region (46th, up eight) while Iran (99th) and Yemen (140th) lose some ground. The region has caught up significantly on ICT adoption and many countries have built sound infrastructure. Greater investments in human capital, however, are needed to transform the countries in the region into more innovative and creative economies.
Eurasia’s competitiveness ranking sees the Russian Federation (43rd) on top, followed by Kazakhstan (55th) and Azerbaijan (58th), both improving their performance. Focusing on Financial development (52.0), and Innovation capability (35.5) would help the region to achieve a higher competitiveness performance and advance the process towards structural change.
In South Asia,India, in 68th position, loses ground in the rankings despite a relatively stable score, mostly due to faster improvements of several countries previously ranked lower. It is followed by Sri Lanka (the most improved country in the region at 84th), Bangladesh (105th), Nepal (108th) and Pakistan (110th).
Led by Mauritius (52nd), sub-Saharan Africa is overall the least competitive region, with 25 of the 34 economies assessed this year scoring below 50. South Africa, the second most competitive in the region, improves to the 60th position, while Namibia (94th), Rwanda (100th), Uganda (115th) and Guinea (122nd) all improve significantly. Among the other large economies in the region, Kenya (95th) and Nigeria (116th) also improve their performances, but lose some positions, overtaken by faster climbers. On a positive note, of the 25 countries that improved their Health score by two points or more, 14 are from sub-Saharan Africa, making strides to close the gaps in healthy life expectancy.
The Fourth Industrial Revolution and the (Unwarranted) Pessimism over Jobs
Ever since homo erectus carved a piece of stone into a tool, the welfare of our species has been on the increase. Indeed, this technological breakthrough led first to the hand axe, and eventually to the iPhone. We have found it convenient to organize the most dramatic period of change between these inventions into four industrial revolutions.
As each revolution unfolded, dire predictions of massive job losses ensued, increasing with each. The first three are over, and these concerns were clearly misplaced. The number of jobs increased each time, as did living standards and every other social indicator.
McKinsey predicts that 800 million workers could be displaced in 42 countries, or a third of the workforce, because of the Fourth Industrial Revolution (4IR). When reminded of the experience with previous revolutions, the comeback is often that this one is different. Although this has been said at the onset of each revolution, could there be something more to it this time?
Disruptive technologies such as artificial intelligence, robotics, blockchain and 3D printing are indeed transforming social, economic and political systems, often in unpredictable ways. The technology itself is difficult to map because its growth rate could be exponential, factorial or higher. It is this unpredictability that is making impact assessments difficult. Difficult but not impossible.
To begin with, we know that a lot of low-skilled, repetitive jobs are being automated, starting in high wage countries but quickly spreading to the developing world. And not all high-skilled jobs are immune either.
But are there limits? To answer this question, we need to first understand how work has been transformed, especially with global value chains. Jobs now consist of a bundle of tasks, and this is true for all skill levels. As long as one of the multitude of tasks that a worker performs cannot be technically and economically automated, then that job is probably safe. And there are lots of jobs like that, although it may not appear so, on the surface.
For example, although most tasks performed by waiters can be automated, human interaction is still required. Human hands are also highly complex and scientists have yet to replicate the tactile sensors of animal skin. The robot may deliver your soup, but struggle to place it on your table without spilling it. Apart from what vending machines can dispense, some of the tasks associated with waiting tables will still require humans.
The debate also tends to wrongly focus on gross rather than net jobs, usually unintentionally. But it is the net figure that matters in this debate.
For instance, greater automation of production processes will require greater supervision and quality control. Humans will be required to carry out this function. The focus on gross ignores the higher skilled jobs created directly as a result of greater automation.
And as long as the cost of adding more supervisors does not outweigh the savings from automation, the reduction in the price of the final good would spur an increase in demand. If the increase in demand is large enough, it could even expand the number of jobs in factories that automate part, but not all, of their production process. In this case, the automation leads to a net increase in jobs.
There will also be inter-industry effects. Productivity gains from new technology in one industry can lower production costs in others through input–output linkages, contributing to increased demand and employment across industries. Higher demand and more production in one industry raises demand for other industries, and on it goes.
Why then the widespread pessimism about the 4IR and jobs?
It could be that it is easier to see how existing jobs may be lost to automation than it is to imagine how new ones may emerge sometime in the future. Simply put, seeing is believing. In a sense, this is like the gross versus net confusion, but separated by time and greater uncertainty.
It is also more sensational to highlight the job displacing possibilities than the job creating ones. We also hear more about it because while the benefits are widely dispersed across the general public through lower prices, the costs are concentrated and can displace low-skilled workers, providing greater incentive to organize and lobby against or complain about the costs.
Furthermore, when there is enough uncertainty, it is generally safer to overstate rather than understate the potential cost to innocent victims of change. All of these factors could combine to explain the unwarranted pessimism over jobs.
But there could be a silver lining to all this negativity. If it leads to greater efforts to reskill and reshape the workforce to better adapt to change, then this is exactly what is required, and there is no overdoing it. Ironically, it could well be this pessimism that produces the preparedness that results in it being misplaced, if not to begin with, but in the end!
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