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The British Economic Collapse – A Harbinger of Economic Doom for America?

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Britain’s politico-economic fiasco of the past six weeks culminated in a tragicomic anticlimax. The 45-day Prime Minister Liz Truss resigned, as many had predicted before she even took high office last month. Rishi Sunak, the incumbent Prime Minister (Britain’s third in two months), had vociferously criticized Truss’ flamboyant yet idiotic fiscal plan during the summer run-up campaign to replace Boris Johnson. In hindsight, while she successfully managed to woo the ultra-right Tories with her anti-immigrant and pro-Brexit rhetoric, her inane economic policies failed to enchant the financial markets. And in mere weeks, as Great Britain nudged normalcy after grieving its longest reigning monarch, Truss’ ill-timed tax cuts and brazen borrowing plans wreaked havoc. The British pound tanked to record low; mortgage rates shot to stratospheric levels – forcing the Bank of England (BoE) to intercede to soothe the markets and safeguard the vulnerable pension funds from collapse.

Admittedly, the United States is witnessing relative political stability – at least compared to the Trump tenure. The American economy is heading toward a recession piecemeal. However, the Federal Reserve shows no sign of panic or loss of control. And the investors are patently not losing confidence in the US government, unlike the jitters on display across the Atlantic. Nonetheless, there are a few concerning parallels between the Western duo.

To recap and analyze in-depth, we should first ask ourselves: Why did the British economic plan backfire? It is a well-known fact that Britain is one of the most pivotal Western industrialized economies – 6th largest in the world. Yet an inflationary mini-budget still earned it a rare public rebuke from the International Monetary Fund (IMF) over fiscal imprudence. Such remarks are usually reserved for emerging economies with a notoriety for fiscal irresponsibility. It was not because of the £45 billion in unfunded tax cuts – Britain’s biggest tax package in over five decades. But it was a reaction to the contradiction sketched by the Truss regime between Britain’s conservative monetary policy and quasi-liberal fiscal strategies. The IMF unerringly realized that this tussle would only exacerbate the economic uncertainty already looming in the aftermath of the Russian invasion of Ukraine.

In a period when the Western world alongside the Bank of England (BoE) tightened policy to wrestle with energy-fueled inflation, the British government tabled a plan – sans any independent assessment of potential fiscal impact – to borrow funds to finance utopian tax cuts and eliminate limits on Bankers’ bonuses. In a span when the working class witnessed ballooning energy bills, the Truss government planned to kickstart economic growth via primitive trickle-down economics without any substantive agenda to invite foreign investments.

Naturally, the financial markets revolted by dumping UK debt causing interest rates to spiral; mortgages to skyrocket; pound to drop to almost parity with the US dollar. The new Chancellor of the Exchequer immediately reversed most of her policies before she even egressed the office, while forewarning of painful spending cuts to come. Still, the markets shadowed the announcement of the UK’s next Prime Minister with an ambiguous reaction as sterling slipped 0.17% against the greenback – erasing the earlier gains – while bonds rallied to pre-budget levels.

Thankfully, the United States is not even remotely in the same shoes. But political uncertainty is brewing in the US Congress as well.

The Biden administration has somewhat restored the lost stability totemic to the American political scene. The Make America Great Again (MAGA) tendencies have receded if not completely effaced. And the United States is seemingly back to its classical balance of diplomacy and deterrence that was noticeably missing since 2017. Yet, not all is sunshine in the domestic and international dynamics. The Democrats welcomed this year with a thin majority in both houses. Their mid-term election prospects gradually improved with collective success in Europe against Russia. The Republican blunders like the reversal of Roe v. Wade further favored Biden’s case.

However, the short-sightedness of the Group of Seven’s (G7) ambitious price cap on Russian energy supplies and China’s force posturing in the Indo-Pacific region disillusioned the American patriots. Iran’s bold collusion with Russia by allegedly supplying military drones in Ukraine has further weakened the American illusion of power. The recent slap in the face has been the Saudi betrayal leading OPEC+ to cut global oil supply by 2 million barrels/day, even after Biden bumped fists with crown prince Mohammad Bin Salman (MBS) during his domestically criticized visit to Saudi Arabia in July.

As the gasoline prices have picked up in the last few weeks and inflation is increasingly proving obdurate, the Democrats could lose both houses – or at least the Senate – which could plausibly trigger a Britain-like bedlam. The trigger point is somewhat apparent: The contentious US debt ceiling.

According to the IMF estimates, the US and the UK are two of the most highly industrialized economies running huge deficits in both their budgets and current accounts. According to data from the IMF’s World Economic Outlook (WEO) database, Britain’s current account deficit this year would be about 4.8% of its Gross Domestic Product (GDP); 3.9% for the United States. Both nations have borrowed over 4% of their respective GDPs to fund these gaps. Such huge deficits imply a continual need for capital inflow. Now I admit that advanced economies like Japan and France also run huge government deficits. But no member of the G7 has a deficit on their current account quite like that of Britain and the US register. And while I unequivocally agree that the US treasuries are currently running in the opposite trajectory of UK gilts, a crisis could ensnare the American economy if the Republicans gain control of either of the houses of Congress and enforces a debt limit on government borrowing.

While theoretically, it could push the US government to default on its debt and plunge the global economy into chaos, the more likely outcome is a compromise in the form of spending cuts – a repeat of Obama’s begrudging submission to Republican pressure in 2013 in hopes of a long-term deficit-reduction deal. Nonetheless, this impending political browbeating could spook the already febrile bond markets, courtesy of the aggressive tightening schedule of the Federal Reserve. Remember, investors’ doubt in the British government’s fiscal plan caused the current market meltdown, not any actual sign of imminent default. It illustrates that in the sensitive market environment today, all it takes is market skepticism that gradually snowballs into a formidable economic nightmare – even for an advanced economy.

Another risk is the bustling value of the US dollar. This year alone, the greenback has gained more than 18% against a basket of key currencies, according to the benchmark ICE U.S. Dollar Index. The Fed’s accelerating rate hikes have pushed the dollar to a multi-decade high – even against the currencies of its major trading partners. Consequently, American exports have turned expensive; imports have turned cheaper. Thus, US exports are in line to fall while imports gain, further widening the current account deficit. I fear that a sell-off in the US treasury market could invoke a financial crisis dwarfing the Great Recession of 2008. Fortunately, US securities are a staple for risk-averse investors seeking an economic haven. And virtually every major global transaction – from the oil market to commodities – is settled in the US dollar. Thus, I reckon that the US markets are far more stable than their British counterparts.

Ultimately, the ubiquity of the US economic presence does pose some challenges. The economic pain exported globally by the United States due to a straightening dollar could lead to financial turmoil in one of its major trading partners. Japan is a perfect example. The rate hikes by the Federal Reserve have plummeted the Japanese yen to a 32-year low against the US dollar. Yet the Bank of Japan (BOJ) is persistent in keeping interest rates low to allow its historically moribund inflation to liven up.

My apprehension, however, lies in the perception of inflation. Japan’s inflation of 3% is not demand-driven but imported from abroad, on the back of inflated fuel and food prices. Recent history suggests that Japan would not resort to rate hikes, which would pinch local businesses and dent public sentiment without actually lowering inflation. However, Japan could stop buying or even partly liquidate its immense holdings of US treasury securities totaling about $1.23 trillion to service its staggering debt – circa 260% of its GDP – without cutting public spending. This scenario is just one example of many that could spark a crisis. The frightening reality is that unlike the contained financial debacle of Britain, a panic run in the US capital markets would devastate the global economy. And hence, Britain’s fiscal blunder should be an omen to the US policymakers to address its chronic budget and current account deficits, and mitigate its prohibitive borrowing sprees before it is too late to redress.

The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.

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From unidimensional to 3D: the contours of the post-Bretton Woods world

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The start of the year 2023 was marked by a series of statements coming from representatives of BRICS countries concerning plans to create new currencies. In particular, Brazil’s President Lula called for the creation of common currencies among BRICS and MERCOSUR countries, while Russia’s Foreign Minister Sergey Lavrov stated that the creation of the BRICS common currency would feature in the discussions at the BRICS summit to be held in South Africa this year. And even as a lot of these changes in the international monetary system will take time, the vector of this transformation is becoming increasingly clear. The new international monetary system will be increasingly geared towards the creation of new regional currencies that will aspire to take on a global reserve status alongside the current pantheon of the select currencies of advanced economies. A multi-regional international monetary system in which the key regions of the developing world form their regional currencies may offer greater optionality to the global financial markets and will reduce the dependency on the few select reserve currencies.

A fragmented global financial system consisting almost exclusively of national currencies leaves scope for excessive dependency on the currency of the dominant economy. This in turn creates sizeable vulnerabilities in the form of a “moral hazard” and “too big to fail” considerations – the debt ceiling in the US is duly elevated to avoid default, while the “exorbitant privilege” of the US dollar as the global reserve currency is feeding “moral hazard” patterns in the form of greater fiscal profligacy and the emergence of related theories such as MMT.

As stated in the recent IMF report, “despite the weaknesses of the current reserve system (the “New Triffin dilemma”) any significant shifts away from the status quo are only possible if and when there are viable alternatives to the dominant currencies.”[1] . This recognition by the Fund of the fundamental weakness of the current monetary system (while conditional on the emergence of alternatives) is an important testament to the rising doubts regarding the “infallibility” of the current monetary system. One way to look at some these deficiencies is to realize that high inflation in advanced economies is currently undermining the value of these countries’ state debt – the ratio of US state debt to GDP by the end of 2022 declined by nearly 9% of GDP compared to Q1 2021 on the back of an inflated (due to price growth) nominal GDP. This depreciation in the value of US public debt is adversely affecting the reserve holdings of those countries that have opted to invest heavily in US dollar-denominated assets. At the same time, along with the inflation-related reduction in the debt-to-GDP ratio the nominal stock of US debt continued to grow and forced repetitive increases in the US debt ceiling over the past years. This time around in 2023 the risk of a US default due to the fragilities in the balance of power in US legislature came as yet another scare to emerging markets and a reminder of the perils of high dependency on one sole center of “gravity” in the global economy.

To overcome this high dependency and the fragmentation of the currency space in the Global South developing countries can form larger currency blocks – whether regional (as in the case of the proposed currency for MERCOSUR economies) or transregional (as is the case with the proposed R5 BRICS currency basket). This process of aggregation in currency unions across the Global South if continued may lead eventually to the formation of currencies with sufficient economic weight in terms of the underlying GDP and reserve size of members to merit their inclusion into the group of global reserve currencies.

The international monetary system formed on the basis of macro-regional currency unions will present greater opportunities for advancing new candidates for the position of global reserve currencies. Across the Global South there may be at least three regional currencies with sufficient economic weight to be potentially included into the set of global reserve currencies:

  • A Latin America common reserve currency
  • An African common reserve currency
  • An Asian common reserve currency

The Latin American track has already been promulgated by Lula da Silva in Brazil. In Africa the formation of the AfCFTA as well as the rising global prominence of the African Union (likely to become a full-fledged member of the G20 in the coming years) bode well for gradually moving towards greater coordination in the economic policies of not only the national economies of the African continent, but also its regional integration and currency arrangements. In Asia, several proposals have already been unveiled in the past several years, including the possible creation of a Pan-Asian single currency as well as a common currency for the members of the Shanghai Cooperation Organization.

All these regional currencies have the potential to carry enough economic weight and scale in the form of their respective integrated regional blocks to enable them to attain the global reserve currency status. The potential for regional currencies to become integral parts of the global financial system is expanded by the optionality in the modalities of regional currencies/regional agreements in the monetary sphere that may include:

  • Regional baskets
  • Regional currencies that replace existing national currencies
  • Regional swap lines
  • Digital regional currencies/currency baskets
  • Regional accounting units 

The new currencies, whether regional or trans-regional, will need an anchor or a reference point, a role that has thus far been primarily filled by the US dollar and the euro. The rise of China as the main trading partner of the economies of the Global South implies that it may be time for the developing economies to change the reference point away from the dollar and the euro towards the yuan and/or the BRICS reserve currency (in which the yuan would likely take a sizeable share). In particular, those developing economies with fixed/pegged exchange rate regimes could consider the possibility to shift towards pegging their currencies to the BRICS basket and/or employing this new currency increasingly as an accounting unit. This would accord well with the trends of the past decade characterized by growing importance of South-South trade; it would also provide more favourable conditions for further expediting the diversification of foreign trade and investment towards the South-South track after decades of under-trading among the developing economies (including among the regional partners in the developing world).

The latter point may need some elaboration – for decades the trading patterns of the developing economies were largely characterized by high shares of trade with the leading advanced economies such as the US and the EU and lower-than-potential trade shares accorded to the regional neighbours of these economies. The indications of the gravity model that traces trade intensity to distance among countries and their economic weight (as measures by GDP) suggest that there is tremendous potential to boosting regional trade given the lower gravity of distance. Regional economic integration and the creation of regional currencies, like the planned launching of the regional currency SUR in Latin America, would serve to realize this potential for South-South regional trade for the benefit of global economic growth. 

The three key pillars of a revitalized international monetary system will need to include the following Post-Bretton Woods principles, or 3D principles as per below:

  • Demonopolization (Poly-centricity): a system that is predicated on a set of reserve currencies that include a number of regional currencies as well as possibly trans-regional baskets of currencies – the resulting pattern is that of a co-existence of reserve currencies from EM and DM without a “core-periphery” pattern setting in the global monetary system
  • Depoliticization: the new international monetary system will also need to contain a “de-politicization clause” as one of its key foundations – the reserve currencies will need to carry a legal affirmation of the non-use of these currencies in imposing sanctions and other restrictions
  • Dis-inflation: with the “exorbitant privileges” of the DM currencies dissipating, inflationary fragilities in the global monetary system may be attenuated; at the same time the competitive edge in the global monetary system will start to gravitate towards those currencies that are credibly backed up with reserves/resources.

Compared to the unidimensional paradigm of the current monetary system, these 3D principles are meant to render the vision of the international monetary system more objective and real – the new system needs to reflect the changing realities and dynamics in the world economy, including the emergence of new regional economic centers; it also needs to address the growing demand on the part of the international community for currencies to be real, i.e. duly supported by countries’/regions’ reserves/resources.

Another way to picture the 3D vision for the international monetary system is to introduce a regional layer into the monetary system that is represented by the regional integration blocks, their currencies and development institutions. This regional layer would complement the layers of national economies at the bottom and the global economic institutions (such as the IMF and the World Bank) at the top. The main ingredients for the regional layer of the international monetary system are largely in place and consist of the following three key elements:

  • Regional financing arrangements (RFAs)
  • Regional development banks (RDBs)
  • Regional currency mechanisms

For the financial markets an international monetary system characterized by the emergence of regional economic and currency blocks may result in a decoupling of emerging markets (EM) from developed economies (DM) – contrary to the current paradigm whereby the dominance of US and EU financial markets determine to a large degree the overall direction of market dynamics in the developing world.

In the end, the international monetary system is not out of the woods just yet – the fragilities that resulted in the rising frequency of global downturns throughout the past several decades are yet to be addressed. One of the key pathways out of the limitations of the current Bretton Woods setup is to expand the array of reserve currencies with the new regional currencies that could emerge in the Global South. The evolving international monetary system cannot be disassociated from the future progression of the global economy, including its trade structure and patterns of investment flows. In this respect the regionalization of the global economy and the rise in the prominence of trading blocks and their regional development institutions (regional development banks and regional financing arrangements) will increasingly call for greater regionalization of the international monetary system.  

[1] Aiyar, Shekhar, Ilyina, Anna, and others (2023). Geoeconomic Fragmentation and the Future of Multilateralism. Staff Discussion Note SDN/2023/001. International Monetary Fund, Washington, DC.

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Friend-shoring: India’s rising attractiveness for an emerging partnership

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There are numerous forces currently affecting investment flows in the global climate for foreign investment. Investor concern has been caused by the many geopolitical issues, which had repercussions even as countries were recovering from the pandemic. Businesses are being forced to re-evaluate the global business environment and potential fault lines as a result of these disruptions. India has constantly improved the business environment (EoDB). It may now advance by utilising the advantages to strengthen its place in the global economy and fulfil the ambitions of its sizable, primarily young population. The country’s business and investment climate has significantly improved as a result of the fast and steady pace at which reforms have been implemented.

Apart from the fact that India is one of the largest economies in the world with the quickest rate of growth, the government’s emphasis on infrastructure and manufacturing, strong consumption patterns, digitization, and a burgeoning services sector all contribute to this optimism. The persistent efforts of the Indian government to lower regulatory hurdles are also fuelling MNCs’ favourable opinion of India. However, India’s expanding domestic consumer base and digital economy are the greater draws. After the US and China, the estimated actual growth in consumption is the third-highest. Given that all of these markets are sizable but relatively saturated and growing at a slower rate, India presents a particularly good opportunity for MNCs seeking growth opportunities in the ensuing ten years.This has acquired more traction in the US context as it has become clear that the nation cannot overcome all production issues on its own and that cooperation with friendly or ally nations is essential for all-around development. The term “friend-shoring,” a hybrid of the terms “onshoring” and “near shoring,” refers to forming business alliances with people who have similar principles and interests.

In a world driven extensively by globalisation, it is inevitable to not just make ally’s or create partnerships that are not only strategic and synergistic, but also facilitate a purpose driven iterative connection between two nations. A strategy used by the US to persuade companies to relocate their sourcing and manufacturing operations to friendly shores—often back to the same shores in the case of the US—is known as friend-shoring or ally-shoring. And the goal is to protect their supply networks against countries with less compatible policies, like China. But is it the best course of action? Global supply chains have changed production by enabling businesses to produce things wherever it is most affordable, thanks to decreased tariffs, lower transportation, and communication costs. This typically means that low-end production shifts to emerging markets and developing countries, while high-value-added inputs (such as research and development, design, advertising, and finance) are provided from established economies.

A commitment to cooperate with nations that “have a strong adherence to a set of norms and values about how to function in the global economy and about how to govern the global economic system” was described as “friend-shoring” in Secretary Yellen’s statements of April 13, 2022. But is it the best course of action? Any type of protectionism will worsen the already shaky global supply chain after the years-long Covid-19 shutdown has had an impact on the world economy. Despite its political unrest, China has been devoting its resources to manufacturing since the 1990s, and many businesses have already established manufacturing operations there since their suppliers are all nearby.

Even though Vietnam, India, and Thailand are also known for their low-cost manufacturing, moving the manufacturing sites could be expensive and risky for businesses because they would need to reorganise their entire supply chain for all materials required. In addition, other Asian countries might not have the full infrastructure needed to support manufacturing in some sectors. The world of today is at its best because of international cooperation. Each country’s disadvantage is made up for by having it use its greatest asset to boost global economic growth. Although there are many differences and even disagreements between nations and we are still far from full globalisation, offshoring does not seem like a good answer for a better future for the global supply.

USA is believed to pursue the “friend-shoring” strategy of deepening economic integration with dependable trading partners like India to diversify away from nations that pose geopolitical and security risks to supply chains. This is in response to an “extremely challenging” global economic outlook and geopolitical instability. She claimed that some economies’ debt loads were becoming unmanageable due to the Russia-Ukraine war-related spike in food and energy costs, and that steps to reduce these debt loads would need to be explored. Countries that already have well-established production and business service networks are those that are seen as friendly partners in the US context. India is attempting to draw MNCs that are moving their subsidiary supply chain networks and activities in this wave of supply chain restructuring and diversification of their specialised ecosystems.

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Pakistan’s elite and the current economic crisis



Former Pakistan Finance Minister Miftah Ismail in a media interview made some very interesting points. While Ismail lashed out at his successor and current Finance Minister Ishaq Dar saying that the latter’s Anti International Monetary Fund (IMF) approach was one of the key reasons behind the current economic crisis in Pakistan. He also underscored some other points.

 First, he said that if countries like Bangladesh and India have left Pakistan behind, there are some serious deficiencies in Pakistan’s governance model.

Second, Ismail stated that different forms of government – democracy, parliamentary democracy, dictatorship – have been tried out, but the country is invariably ruled by a small elite, and this is amongst the key reasons for the numerous challenges the country is facing today.

In recent years, has been increasing criticism of Pakistan’s foreign policy and its excessive economic dependence upon other countries for its economic survival.  While earlier strategic commentators and analysts questioned the skewed nature of Pakistan’s ties with the US, in recent years several strategic commentators have begun to question the excessive dependence upon Islamabad and the terms and conditions of China Pakistan Economic Corridor (CPEC), and the lack of transparency of the project.

If one were to look at the current economic crisis which has engulfed Pakistan, there have been a series of opinion pieces critical of domestic policies, the country’s dependence upon external sources for aid not just the US, but also Gulf Countries and China and how the IMF rescue program would impact certain sections of the population more than others.

Maleeha Lodhi, a former Pakistani diplomat, and a prominent writer and commentator, in a hard hitting article titled Elite Politicsfor Dawn (December 5, 2022)argues:

‘The availability of external resources as a result of Pakistan’s foreign policy alignments during the Cold War and beyond created a habit of dependence on ‘outside help’. This habit urged successive governments — representing rural and urban elites — to avoid economic reform, mobilise adequate revenue or tax its network of influential supporters’. 

Touqir Hussain in an article An underwhelming foreign policy written for The News (November 23, 2022) highlights how Pakistan’s dependency upon China could harm the bilateral relationship. Says Hussain:

‘Because of the dependency syndrome, even the China connection has become ever more important for Pakistan, and not for all the right reasons. It is fomenting a popular view that with China at its back Pakistan does not need to care about other relationships, inciting anti-Americanism which has become in the public mind a badge of ‘independent’ foreign policy’.

S Akbar Zaidi in an article IMF as Saviour for the Dawn (January 26, 2023) makes an interesting point about how the unequal impact of the IMF program and how the elite would not just be able to deal with it but also benefit in the long run. Says Zaidi:

‘A fistful of dollars coming in, prices being upwardly adjusted, an exchange rate which is supposedly ‘market-driven’, will offer false hope to our elite while it grumbles about the tough measures of the IMF’. 

There has also been a suggestion to rethink Pakistan’s approach towards India and focus more on geo-economics. Shahzad Chaudhry, a prominent strategic commentator, in an opinion piece published in Express Tribune praised India’s foreign policy for managing to balance ties between the US and Russia, in the aftermath of the Ukraine crisis. While praising India for having been able to strike a balance he dubbed this as diplomatic coup. Chaudhry also said that Pakistan should rethink its foreign policy vis-à-vis India and focus on ‘geo-economics’.

Pakistan PM, Shehbaz Sharif in an interview to Al Arabiya TV (a Dubai based channel) had himself stated that Pakistan could not afford another war with India and had also alluded to his willingness to resume talks (The Pakistan PMO however said that Pakistan would only resume talks with India if the latter reversed the decision to revoke Article 370 in Jammu and Kashmir).

In conclusion, while Pakistan clearly has its task cut out if it is able to realize the pitfalls of excessive dependence upon external countries will it be able to put its economy firmly back on track. It is also important for Pakistan to strengthen economic ties with neighbours in South Asia rather than looking at the outside world. For this it will require Pakistani leaders to think out of the box.

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