Economic and Political Power in International Affairs - A Partial Framework (2024)

Economic size, economic power and international influence are correlated. The United States and China do not only have the largest economies, they are also the largest military spenders. Typically a function of its economic size, the level of military spending a country can afford is only one aspect of its international power. The ability to impose costs or confer benefits on other country by intervening in cross-border trade and financial transaction is another important aspect of a country’s international power.

Economic size, resource mobilization and international economic power

Economic size confers a country the ability to mobilize resources in support of its foreign policy objectives. The size of an economy is a good proxy of its resource availability. An important caveat is that high per capita countries have, all other things equal, a greater ability to extract resource before domestic consumption falls below sustainable or even subsistence levels. A country with a low level of per capita income cannot extract more resources than a country with a high level of per capita income, all other equal.

Economic mobilize-ability refers to the share of economic output that can be dedicated to the pursuit of foreign policy objectives on a sustainable basis over a given time horizon without jeopardising economic stability. Political mobilize-ability refers to a government’s ability to mobilize resources over potential domestic opposition. It stands to reason that less democratic regimes may face fewer political constraints in this respect than democratic ones. The Russia-Ukraine war and the uncertainty about the willingness of Western countries to support Ukraine is a case in point. On the other hand, history also suggests that in the face of major, as opposed to minor geopolitical threats, and particularly in the context of an armed conflict, democracies are quite capable to mobilizing huge amounts of resources in pursuit of their foreign policy objectives. The ramp-up of defense production and the reduction of private consumption following the U.S. entry into World War suggests as much. The US fiscal deficit reached 30% of GDP in 1943.

Broad geopolitical influence is in part a function of a country’s ability to spend more than its antagonists. Over the long run, differences in real GDP growth will impact economic size and relative resource availability. However, an economy that is characterized by a low level of per capita income and small population size would need to grow significantly faster over an extended period of time to narrow the difference vis-à-vis a much larger and richer country. Even if Luxembourg grows twice as fast as Germany, the relative resource availability will not be significantly changed twenty years from now.

Governments can mobilize additional resources domestically or internationally. Domestically, they can do so by relying on rapid economic growth, raising taxes and cutting expenditure unrelated to its foreign policy objectives, or by running a larger fiscal deficit. Governments can also raise resources externally through issuing debt or receiving financial support from other countries. In the long term, however, countries will generally run into constraints if they rely on domestic or external borrowing rather than their own resources over an extended timeframe. 

In practical terms, the United States will always spend more resources on defense and foreign policy than an economically much smaller economy like Mexico. However, this is less likely to be true when comparing Chinese and US defense expenditure, for example. China is growing more rapidly than the United States and it has room to increase defense expenditure, which is far lower as a share of GDP than in the United States. The point is that in the case of economically similar-sized geopolitical competitors, differential growth rates do matter, at least over the longer term. 

In addition to economic resources and the ability of governments to extract resources in support of a country’s foreign policy objectives, its ability to intervene in the cross-border exchange of goods, services, capital, technology and data is also an important source of geopolitically relevant economic power.

Economic interdependence and international economic power

A high level of economic interdependence provides countries with opportunities to take advantage of interdependence and exploit economic-financial vulnerabilities by imposing or threatening to impose economic costs or conferring or promising to confer benefits on another country. This works best when interdependence is asymmetric and the target country finds it difficult side-step the costs of adversarial measures. 

First, a country’s ability to restrict cross-border trade has the ability to impose costs on another country. Imposing tariffs on imports leads to lower exports and lower economic growth. While it also translates into economic costs in the country imposing tariffs, the costs to the target country are far greater if the relationship is asymmetric. If U.S. tariffs make it more difficult for China to exports goods to the United States, its economic growth will suffer. 

Second, countries can also impose export controls, often prohibiting the sale of specific goods to specific countries. This can to significant economic disruption in the target country. The United can restrict the export of advanced semi-conductors to China, while China can restrict the export of rare earths. Countries ability to impose costs, and thereby potentially exercise influence, is significantly enhanced if restricted goods cannot be easily, or at all, replaced, increasing the opportunity costs of supply. Arab oil producer embargo massively increased prices and imposed significant costs on advanced economies in the context of the Yom-Kippur War of 1973.

Third, a country, or rather a government, can offer or withhold financing to another country. To the extent that nobody else may be willing to extend financing, for example during a financial crisis, at sufficiently attractive terms, the sender country may be able to exercise power, not least by withholding financing. Moreover, some countries, like the United States, have significant institutional leverage due to their prominent position in international financial institutions, like the International Monetary Fund or the World Bank. In Europe, the larger euro area members can exercise power by vetoing the extension of credit to crisis-ridden members in the context of the euro area architecture created in the wake of the euro area financial crisis 15 years ago.

Fourth, with the help of inward investment restrictions, governments can exclude companies from specific countries to buy certain types of companies. This often serves as a way of restricting other countries’ access to technology and intellectual property rights and can help weaken the longer-term development prospect of countries. Similarly, outbound investment restrictions, most recently introduced by the United States, have a similar objective of limiting technology leakage to companies in other countries, in this case China.

Economic interdependence, sanctions and risk mitigation

Influence and susceptibility to influence is a function of the relative of the target country’s dependence on the sender country with respect to a specific type of cross-border flows. How vulnerable a country is depends on the opportunity costs of neutralizing adversarial measures. In the case of sanctions, for example, third-party spoilers and black knights, whose intervention is motivated by economic gain and geopolitical interests, respectively, can help limit the opportunity costs. This is why enforcement vis-à-vis third parties is often key, as Western policymakers have begun to find out when it comes to imposing economic costs on Russia.

What can countries vulnerable to, for example, trade restrictions do to mitigate risks? Answer: Reshoring, friend-shoring and diversifying. Reshoring is typically costly, as production and supply chains are moved from low-cost countries to higher-cost places. Reshoring as such may reduce international vulnerability, provided no critical part of the supply chain is left vulnerable, but a higher geographic concentration of production may increase risks if domestic production is negatively impacted by shocks. Friend-shoring tends to be less costly than reshoring. Finally, diversification is also costly, as companies need to put in place more diversified supply chains but redundancy helps with risks. But it typically offers the best trade-off between risk reduction and costs.

Are sanction efficacious then? Leaving aside third-party spoilers and black knights, the academic research suggests that economic and financial sanctions in the sense of changing another country’s behaviour are rarely successful in the case of targeting a geopolitical adversary. Sanctions are more successful in case of geopolitical allies. This can be rationalized by the closer economic relations between allies and the higher costs sanctions cause, and also by the likely lower geopolitical stakes given the target and sender countries geopolitical proximity. Similarly, in case of geopolitically adversarial countries, a less extensive economic relationship typically means that sanctions lead to lower costs in the target country, while the political stakes are necessarily higher. This does not mean that sanctions never work in terms of changing an adversary’s behaviour (e.g. US-Iran), but it is relatively rarer. Again, Western sanctions targeting Russia are a case in point. This does not mean that sanction cannot be or are no t effective in terms of imposing economic costs, signalling (domestic and international), deterrence or degrading a target country’s economic base. But they rarely lead to a change in desired behaviour.

The varieties of international economic power

Broad international power and influence is to a large extent a function of a country’s ability to mobilize resources. It is also a function of a country’s ability to exploit asymmetric interdependence by restricting or supporting the cross-border flow of goods, services, capital and technology. Economic size matter, but it is not the only thing that matters in terms of exercising power in international politics. A stable economy, limit vulnerability and solid long-term growth prospect combined with a significant overt or latent ability to mobilize economic resources and convert them into diplomatic or military power. Asymmetric economic and financial relationships and another country’s limited ability to offset cost-imposing measures by forging close economic and financial relations with a third country are another important source of power international politics.

Why Europe Has Made Little Progress on Banking Union (2024)

Europe’s banking union remains incomplete and the prospect of significant progress toward closer integration, particularly with respect to a common deposit insurance scheme, remains unlikely, as creditor countries are unwilling to indirectly backstop debtor countries’ sovereigns. The euro area sovereign and financial crisis which started almost exactly fifteen years ago led European policymakers to the realization that Europe’s fragmented banking supervision regime, largely under the purview of national authorities, required significant strengthening. Economic and Monetary Union (EMU) had been intentionally designed in such a way as to force members to take responsibility for their own financial stability by prohibiting individual members from assuming the financial liabilities of others. In the face of the financial crisis late noughties, however, the absence of an overarching financial architecture capable of pre-empting a systemic financial crisis due to the so-called sovereign-bank nexus. In some instances, sovereign distress and default caused banking sector instability (Greece, Italy, Portugal). In others banking sector weakness led to sovereign financial distress (Cyprus, Ireland, Spain). Without the ability to intervene and backstop sovereigns and national banking sectors, this nexus risked turning into a self-reinforcing financial doom loop. In response to the Greek financial crisis, the euro area created financial instruments and a financial architecture to deal with financial instability by providing distressed countries with financial support in the form of loans issued to government. In the face of the Spanish banking crisis, Europeans then proceeded to consider the public, joint and direct recapitalisation of banks through the European Stability Mechanism, which originally was meant to provide loans to governments only. With a fiscal union not on the agenda due to creditor country opposition and a desire to sever the sovereign-bank nexus, banking sector union represented a second-best solution. The reform of the euro financial architecture, including the move towards banking union, allowed ECB President Mario Draghi to give his “whatever it takes pledge” in the summer of 2012, which effectively saved the euro area from a financial meltdown and potential breakup. 

> Pre-crisis, there existed only limited harmonisation of banking regulation, but only in the form of directives rather than regulations, such as the Banking Directive (2000) and the Capital Requirements Directive (2006). National authorities remained in charge of supervision. The EU also created a Committee of European Banking Supervisors (CEBS) in 2004.

> The Maastricht Treaty contains an enabling clause that allowed the ECB to take on prudential supervision of credit institutions and other financial institution, subject to Council approval and EU Parliament assent. This article formed the legal for the euro area members to establish a banking union and delegate supervision to the ECB.

> In 2012, the Van Rompuy proposed the establishment of a banking union, a fiscal union, an economic union and a political union to strengthen EMU and the EU. Banking union presented the path of least political resistance.

Banking union, as originally envisioned, was to consist of three pillars – supervision, resolution and common bank deposit insurance – but euro area governments only succeeded in establishing the first two. Rather than a politically impossible to achieve fiscal union to sever the bank-sovereign nexus, euro area governments agreed to move towards a banking union by establishing euro area level banking supervision and a resolution authority (including a resolution fund) to reduce the risk of destabilizing financial spill-overs by preventing bank failures from triggering sovereign distress and preventing sovereign distress from destabilizing the national and European banking sectors. The Single Supervisory Mechanism (SSM) entered into force in 2014 and transferred the supervision of larger euro area banks from the national supervisory authorities to the European Central Bank. Smaller and mid-sized remained under the supervision of the national authorities, but the ECB was given authority to intervene in them in case of a risk to systemic financial stability. The Single Resolution Mechanism (SRM), consisting of a Single Resolution Board (SRB) and Single Resolution Fund (SRF), transferred the authority to intervene in and, if necessary, resolve in an orderly fashion euro area banks to the body. But euro area governments failed to create a common European deposit insurance regime and a common backstop supporting the SRF. Instead, they issued a political declaration that a common backstop would be created to strengthen SRF within the next ten years. Meanwhile, member states would ensure that national deposit insurance schemes would accumulate sufficient funds to cover 1% of their deposits by end-2023, which would then be fully mutualized to support the SRF. 

> All twenty euro area members are members of the SSM. Non-euro area members have the option to participate in the regime.

> The SRF is financed by contributions from banks. A reform was meant to create a common public, if limited financial backstop to the SRF in the guise of a ESM revolving credit line of nearly EUR 70 billion in case SRF resources are insufficient to finance a resolution. This reform has been stalled due to Rome’s unwillingness to ratify ESM treaty change.

> The SRF is not meant to be used to absorb financial losses incurred by a distressed bank or to recapitalize it. Under certain circumstances, the SRF can provide substantial support to a bank under resolution, but only if at least 8% of the bank’s total liabilities have been bailed in and contribution must not exceed 5% of the bank’s total liabilities.

Efforts to establish a common European Deposit Insurance Scheme (EDIS) to guarantee euro banking sector deposits has not made any substantial progress, largely due to opposition from creditor countries like Germany, while the creation of common ESM-backed backstop to SRF has been blocked by the Italian government. As it stands, the SFR has only limited funds to deal with a systemic banking crisis. But creditor countries not willing to make a pledge to guarantee banking sector deposits in the guise of EDIS for fear of indirectly underwriting debtor countries banking sectors and sovereigns. Instead, Germany has pushed for higher capital charges on bank holdings of sovereign debt to reflect their inherent risk. Such concentration charges would reduce the risks to (debtor) countries’ banking sectors. This however is unacceptable to debtor countries, as they rely on their banking sector to provide financing, particularly during a crisis, and if necessary through moral suasion. The so-called regulatory treatment of sovereign exposures (RTSE) is a non-starter for debtor countries, while it is the starting point for creditor countries if they are ever to agree EDIS. Without progress on RTSE, creditor countries are not going to back a European deposit insurance regime, as they are concerned about indirectly risk insuring other countries’ sovereign risk. Meanwhile, the establishment of a (limited) common backstop to the SRF failed due to Italy’s failure to ratify the necessary ESM treaty change. Making further strides toward a more complete banking union will require euro area governments to find a compromise on how to deal with sovereign exposures and how to share the financial risks related to EDIS. The present relative stability of euro area banking sectors, which have managed to make it through the global monetary tightening relatively unscathed compared to some of its American peers, sharply limits the incentives to reach an agreement. It will require another major crisis for substantial progress to occur. 

> The SRF common backstop was meant to replace the so-called (unwieldly) Direct Bank Recapitalization Instrument. Italy continues to block changes to the ESM and has prevented the common backstop from entering into force. We need to send somebody to Rome to find out why the government opposes ratification. The we did not like the way we were treated a decade ago explanation does not strike one as a plausible explanation.

> The von der Leyen EU Commission failed to establish, or make progress toward a European deposit insurance scheme and create a common backstop to the SRF, despite its pledge to do so when it came to office in 2019. This shows just far apart creditors and debtors are on the issue of completing banking union.

 

Argentina - Evaluating the Short- And Long-Term Economic Outlook (2024)

With the election of Milei and the dramatic change in economic policy, the outlook for medium-term economic and financial stabilization has improved dramatically; but absent political-institutional reform, the risk of a return to instability will increase over the long term, largely due to the political system’s inability to manage fiscal-distributional conflict. Under Fernandez (2019-23), pre-electoral spending splurge risked pushing the economy into hyperinflation and a failure to adjust its external financial position, following the 2020 debt restructuring. With the election of Milei, Argentinian economic policy underwent radical change. A reform program anchored on a massive fiscal adjustment has received support from the IMF program and has led to a sharp of inflation, an improving government and external debt position, while also reading to a sharp drop in economic activity. The government has made extensive use of its decree power to push through reform due to a lack of congressional support. If the government persists in following IMF-guided policy adjustment, which is likely, the economy will recover in the context of much reduced inflation by 2027, boosting Milei’s reelection prospects. 

> The IMF projects real GDP growth of 4% and inflation of less than 20% by 2027, a substantial decline from the triple-digit rates in the past few years.

> President Milei has only limited support in Congress, complicating structural, less so macroeconomic economic reform. The Ley bases, which comprises far-reaching market and liberalization structural reforms, was passed by the lower house in April and expected to be approved by the Senate.

Since taking office, Milei has made solid progress towards putting the economy on a more solid footing. A massive fiscal adjustment has allowed the government to generate primary fiscal and overall surpluses. It has also allowed it to stop the inflationary monetary financing of the government, deficit be the central bank as well as improving the profile of domestic debt, including domestic debt swap to reduce roll-over risk. On the external debt side, Argentina has received financing assurances from multilateral lenders and, crucially, China, pledging to roll over portion of PBOC swap not drawn. External surpluses have helped improve the central bank’s financial position. Fiscal and current account surpluses have allowed the authorities to refrain from further monetary financing and the BCRA to strengthen its balance sheet and improve its FX reserve position, even though not negative anymore remain inadequate. 

> IMF successfully concluded eight review under current program in June. Argentina exceeded all quantitative performance criteria with a significant margin and progress on structural benchmarks.

> The IMF expects (hopes) that the government will be able to access international capital markets by the end of 2025. As long as Argentina overdelivers on program targets, the IMF will continue to provide support, thus limiting financial risks.

The economic and financial (reform) outlook will remain challenging. First, while parts of the economy seem to have stabilized, a prolonged economic downturn could weaken the president’s popularity and embolden political opposition, which would lead to a worsening of the reform outlook. Second, further fiscal consolidation to make sustainable. Following the massive fiscal adjustment by presidential decree, the governments needs to lay the foundation for institutionalized fiscal stability by extensive expenditure and revenue reform. Third, the removal of capital controls and the liberalization of the exchange rate are key to reviving international investor interest in Argentina. MCP and exchange restrictions remains in place hindering resource allocation etc. The establishment of an inflation-targeting monetary and flexible exchange rate regime, including MCR and exchange restrictions, is highly desirable to strengthen stability. This will require higher domestic interest rates to create sufficient incentives to get residents to hold pesos. But real interest rates remain in negative territory. The government has pledged to moving toward a liberal foreign-exchange and capital account regime, but this will require higher interest and could in the short term increase inflation, and might thus weigh on the president’s popularity. A failure to pass could lead to renewed domestic political conflict with the president taking more forceful action without necessary political or social support, which could reignite social dissatisfaction, even unrest.

> IMF favors improving the quality of fiscal adjustment and establishment of a monetary and exchange rate regime as well as structural reform aimed at lifting economic growth and productivity/investment and employment

> External surpluses required to re-access international capital markets and generate sufficient liquidity to repay its maturing obligations including IMF loans.

> The government has taken some steps towards greater currency liberalization, but it is far from liberal

The short-term economic and financial outlook is manageable, but it there is little reason to believe that Argentina is in the process of overcoming its long-term susceptibility to recurrent economic instability and financial crises. Argentina has experienced recurrent economic instability and financial crisis. Most recently, Argentina defaulted on its foreign obligations in 2001, 2016 and 2020. While the long history of defaults suggests that defaults happen under differing political regimes, a comparison with more successful and lasting economic stabilization in other Latin America economies suggests that Argentina may yet again fall short of establishing long-lasting economic stability. Chile, Mexico and Brazil have not experienced major destabilization in the past few decades, let alone an external debt restructuring. The countries brought about economic-institutional change without fundamentally changing the political system or constitution. Floating exchange rate, independent and inflation-targeting central bank and commitment to fiscal discipline. Fiscal dominance and political conflict over fiscal and secondarily interest rates. But in Brazil, fragmentation of political system difficult to reverse reform, even though under Lula/ Dilma lack of respect for rules can lead to trouble, but enough checks-and-balances and robust institutions. In Mexico, this will be challenged given MORENA dominance and in view of proposed constitutional reform. Institutional reform necessary to boost long-term confidence and sustainability of reform. Argentina has a history of fiscal dominance, whereby a high-spending government forces the central bank into monetary financing of its deficit in the context of tightening foreign and exchange controls. Distributional politics and government ability to solve distributional issues through higher, if inflationary government spending.

> The last time, Brazil or Mexico defaulted on their foreign obligations was during the so-called Latin American debt crisis of the early 1980s. The last time Brazil and Mexico IMF adjustment program to avoid a broader systemic financial crisis in was in the early 2000s and mid-1990s, respectively.

> Both Brazil and Mexico underwent important reforms of their policy regimes, including the establishment of an independent, inflation-targeting central bank, a flexible exchange rate regime and a political or institutional (even constitutional) commitment to fiscal discipline. This has helped both economies absorb severe exogenous shocks, such as the dotcom bust, the global financial crisis and COVID-19.

> By contrast, Argentina restructured its foreign debt in 2020, following a major default in 2001 and a selective default in 2016. Ironically, Argentina is a major international creditor with household holdings of foreign assets far exceeding public external liabilities. If Argentina managed to convince Argentines that economic and financial stability is here to stay, it could benefit from massive capital reflows.

Following the US elections, US-Chinese strategic rivalry will intensify, and Latin America needs to be clear-eyed about its implications (2024)

Structural factors have been driving US-Chinese competition and rivalry in recent years. In a nutshell, the United States wants to maintain the status quo, and an ascendant China wants to change it. The first Trump administration called an end to the war on terror that had dominated U.S. security policy since 2001 and acknowledged the return of great power competition. The Biden administration labelled China a peer competitor. Judging by the recently announced personnel appointments as well as by the generally hawkishness in Washington towards Beijing, US-China competition will intensify under a second Trump administration.

While it is difficult to predict what precisely the president-elect will do regarding trade policy towards China, personnel choices point towards an intensification of geo-strategic and geo-economic competition. Both Florida Senator Marco Rubio and Florida Congressman Mike Waltz, who have been nominated to be the next secretary of state and national security advisor, are certified China hawks. Moreover, it is difficult to find anybody in Congress, and this includes both Democrats and Republicans, who is a China dove, even though Republicans are on balance more hawkish than Democrats.

All this points an intensification of US-Chinese rivalry, not to a grand bargain, and certainly not a lasting one. It is worth remembering that reforms to the US export control and inward investment regimes took place under the first Trump administration, and the Biden administration further tightened controls. Biden did also not reverse the Trump tariffs during his mandate. What exactly U.S. trade policy will look like, and whether the Trump administration will impose 60% tariffs on imports from China on a permanent basis, is somewhat uncertain. But national-security focused foreign economic policies focused on China are almost certain to become more hawkish in the context of US-China rivalry.

Meanwhile, Beijing has been trying to reduce its vulnerability to unfriendly US geo-economic policies by, among other things, fostering domestic innovation to make itself less dependent on foreign technology and foreign export controls, by internationalizing the renminbi in the hope of blunting potential currency sanctions and by rebalancing its economy and switching towards so-called dual circulation to reduce the negative impact of foreign import restrictions. The expansion of China’s blue water navy and the Belt and Road Initiative similarly aim to protect sea lines of communication and secure China’s physical access to international markets.

A further tightening of US export controls and investment restrictions targeting China is likely. Policies will primarily target dual-use goods and technologies. What does this mean for Latin America? Admittedly, the primary and more immediate concern for the region is to what extent the Trump administration is serious about imposing across-the-board tariffs. But the focus on US-China competition is likely to lead to increasing pressure on Latin American countries to align some of their policies with Washington’s preferences. Washington is unlikely to look kindly at extensive Chinese investment in critical infrastructure in the region. Nor is it likely to sit by idly as (selected) Chinese companies seek to circumvent US import restrictions by investing in third countries, particularly those with which it has free-trade agreements, or by routing trade through third-countries to gain access to US markets. 

This is why Latin America would be well-advised to come up with a forward-looking policy to deal with intensifying US-Chinese geopolitical rivalry and geo-economic competition, otherwise it risks ending up between a rock and a hard place.

Some Random Observations Regarding the Global Demographic Outlook (2024)

The world is in undergoing extensive demographic change, leading to slowing economic growth and increasing public debt in many advanced economies and potentially increasing political and economic instability in developing economies. Differential demographic developments are giving rise to varying economic and political challenges. Advanced economies have been characterized by very slow population growth, stagnating population levels or even outright population decline. This has led to a significant increase in the share of the elderly population and, in some cases, to decline of the work-age population in absolute terms. Upper middle income countries are undergoing very similar demographic changes, although with a time lag. However, in many instances, their demographic transition has been more rapid, largely due to rapid decline in fertility rate. By contrast, low income and many lower middle income (developing) economies continue to be characterized by rapid population growth and rapid increase in the number of people of working age. 

· The world’s population increased from 2.4 billion in 1950 to more than 8 billion last year. In its medium-variant scenario, the UN projects population to peak at 10.3 billion in roughly 2080 and remain at above 10 billion for the remainder of the decade.

· Decades of below replacement fertility rates have begun to translate into stagnating population levels or outright population decline, particularly in countries characterized by low inward and large outward migration. The bulk of the countries experiencing population decline is located in Eastern Europe due to a combination of sharply lower fertility levels and net emigration, mainly to Western European countries.

· Other countries experiencing population decline do so due to economic crisis, civil war or external armed conflict, such as Syria (until recently) and Venezuela. Ukraine, already demographically challenged before the full-scale Russian invasion in 2022, lost 6-7 million people due to Ukrainians fleeing the war. Ukraine’s population has fallen by a third since 1990. It pre-2022 population was 38 million, compared to 52 million in 1990.

Global demographic balances will continue to shift dramatically with advanced and emerging economies aging rapidly in the context of slowly growing, stagnating and declining populations, and developing economies experiencing rapid population growth. The differences in terms of present demographic development between advanced, emerging and developing economies are stark. Virtually all advanced (high income) economies have fertility rates below replacement level, which absent substantial net immigration will lead, or has already led, to stagnating or declining work-age populations. Africa, including North Africa and West Asia will see significant population growth, including a sharp increase in the number of their working-age population. East Asia and parts of Europe will also see, or are already seeing declining working-age population, while North and Latin America will register modest increases over the next quarter of a century, according to UN projections.

· In low-income countries, the fertility rate is 4.6, in middle income countries 2.1 (ranging from 2.6 in lower middle income to 1.5 in upper middle income countries) and 1.5 in high income (advanced) countries. Geographically, the average fertility rate of African countries is above 4, ranging from 6.6 in Niger to 2.3 in South Africa. By contrast, fertility rates are below replacement in Asia (1.9), North America (1.8) and Europe (1.5). In Asia, the rate varies from 2.9 in Central Asia to 1.2 in East Asia. With the exception of Africa and West Asia (and South Asia, barely at 2.2), all regions of the world will experience declining population levels over the next two generations unless fertility rates recover substantially and sustainably, which historically speaking is unlikely.

· By 2050, sub-Saharan Africa’s population will be 2.1 billion (compared to 1.2 billion today), Latin America’s 730 million (660 million), North America 430 million (390 million), South Asia 2.5 billion (2.1 billion), Western Europe 112 million (125 million), Northern Africa 370 million (270 million) and East Asia 1.5 billion (1.7 billion).

· Long-term projections are only as good as the assumptions they are based on as well as the quality of historical data they take as a starting point. The number cited in this comment refer to the UN’s medium variant scenario. Quite likely, this scenario underestimates the speed with which fertility rates will decline in countries that are currently experiencing rapid population growth. Nonetheless, this will do little to alter the sharply diverging demographic trends in advanced versus developing economies.

· A methodological note: The total fertility rate in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates. It is calculated by totalling the age-specific fertility rates as defined over five-year intervals (OECD). In other words, the fertility rate is an unobserved variable.

Politically, aging societies see the emergence of “grey majorities”, which make it more difficult to implement economic reform that negatively affect “acquired rights” and increasingly costly and financially difficult-to-sustain social security regimes. While total population levels may not decline in advanced economies thanks to immigration, they are and will continue to age and see the share of the elderly population increase relative to the working-age population. This emerging “grey majority”, however diverse it may be politically, shares an interest in defending “acquired rights” and oppose cost-saving reform of the social security regime. This raises the medium- and long-term challenges to government finances and might jeopardize economic and financial stability in the context of slowing economic growth. Demographically rapidly expanding societies also face significant economic challenges in terms of integrating an expanding working-age population into the economy. As these countries are often very poor, governments find it difficult to provide education and infrastructure that would support strong, sustainable economic growth and facilitate the integration of young people into the economy. Relatedly, the so-called youth bulge then often makes countries more prone to domestic political violence and instability. Political violence in turn weigh on economic development as well as a country’s ability to attract foreign investment and integrate itself into international supply chains.

· All other things, the combination of demographic stagnation in advanced economies and rapidly expanding working-age population in Africa and the Middle East will translate into greater migration to Europe, including Russia. By comparison, North America will face less pressure given a demographically rapidly maturing Latin America. Migration pressure are not simply a function of demographic pressure, even though the latter play an important role. Political and economic condition in sender countries with large population increases matter, as do the immigration policies of the target countries.

Economically, rapidly aging societies are faced with significant economic challenges, such as slowing economic growth and intensifying distributional conflict. An increasing old-age dependency ratio, defined as “people younger than 16 and older than 65”/ “working-age population, will generally lead to declining savings and increased government pension and health expenditure, or at least political demand for increased expenditure. This in turn will tend to increase government spending and often government deficit as well as public debt, leading to a further intensification of distributional conflict. The dependency ratio can increase even though the population of working-age continues to increase in absolute terms. A relatively and absolutely declining working-age population means that if labor productivity fails to compensate for it, per capita incomes will fall. This does not mean though that demographically challenged countries are doomed economically. They have various options to offset demographic decline. First, liberal migration policies can help offset a shrinking workforce and help keep per capita income growth on an upward trajectory. Second, investment in innovation and technology can accelerate productivity growth. Third, where female labor participation rates are low, policies that help integrate women into the labor market can help. Fourth, policies that create incentives for older people to remain in the workforce for longer (or create disincentives for them leave the workforce) can help slow the impact of a declining working-age population. Fifth, pro-natalist policies may help slow population decline in the longer term, even though in the recent past their impact has been demographically negligible and financially costly. Politically, however, such reform will prove challenging, not least due to the existence of increasingly influential grey majorities. 

· The overall dependency ratios in sub-Saharan Africa and North Africa will decline between 2025 and 2050. In East Asia, North America and Europe, the ratio will increase, in some case sharply. In Japan, the overall dependency will reach 95 and the old-age dependence ratio 80, meaning that for every four people older than 65, there will only five people of working age. In China, the overall dependency ratio will reach 55, compared to 23 today. While much lower than in Japan, the speed with which China’s demographic profile will be deteriorating is much greater. By contrast, India’s old-age dependency ratio will rise from 10 to 20, and America’s from 28 to 38. (medium variant).

 

 

 

 

 

How Dramatic Will the Shift in U.S. Economic Policy Be (2024)?

The Republican sweep in U.S. elections will lead to a shift in U.S. economic policy, which will boost short-term economic growth, but could prove detrimental to the outlook for much of the rest of the world, especially if U.S. trade policy turns decisively and lastingly protectionist. On November 5, the Republican party won the presidential and congressional elections. The president-elect is widely seen to have won a decisive mandate for economic policy change, the electoral remains deeply divided and polarized. The Republican majorities in the House and the Senate are small, but will prove sufficient to push through wide-ranging changes, to the extent that this does not require overcoming a Democratic filibuster in the Senate. 

> Republican presidential candidate Donald Trump won the popular vote for the first time since the re-election of GW Bush in 2004 and won all swing states. Republicans also took over the Senate and to maintain their majority in the House, where they are projected to control 220 out of 435 seats. The Supreme Court remains dominated by Republican-appointed judges (six versus three).

Unified Republican government will have significant leeway to implement Republican economic policy preferences on fiscal policy, deregulation and trade. Unified government will allow the Republican party to push through wide-ranging changes to economic policy, including immigration policies. Moreover, the president will make significant use of executive power in terms of trade and deregulation. The president-elect has pledged to impose broad-based tariffs on U.S. imports, cut taxes, deregulate the economy, particularly the Biden administration’s green transition focused spending, crack down on immigration and take a less restrictive stance on anti-trust policies. The president-elect (or advisor close to him) has also suggested replacing income tax with tariffs, taxing foreign holdings of U.S. financial assets. The new administration will have the greatest latitude to bring about a shift in fiscal policy, which will translate into tax cuts, but at best limited spending cuts. On trade, the government faces statutory constraints in terms of imposing across-the-board tariffs. On regulation and anti-trust policy, the government can repeal existing legislation or make use of executive decrees to block parts of existing legislation, like the Inflation Reduction Act. On other policies, the Republicans will need to overcome Democratic opposition in the Senate.

> Trade policy during the first Trump administration used to protectionist threats and policy measures to renegotiate existing trade agreements (NAFTA, Korea, Japan) or agree to negotiate a trade agreement (European Union). But trade policy also led to the imposition of high, across-the-board tariffs on Chinese imports and sector-specific tariffs on steel and aluminum, and other goods. Given the new administration’s protectionist implications, trade tensions on other issues, such as digital taxes, will increase. In order to impose broad-based tariffs, the president needs to declare a national emergency. Existing trade legislation does not give the president the authority to impose across-the-board tariffs.

> The bulk of spending tied to the Biden administration’s Inflation Reduction Act benefits Republican states, which may lead the Trump administration to target selective provisions rather than all IRA-related spending. There is also significant corporate pushback to repealing the CHIPS and Science Act, which largely aligns with the pro-domestic manufacturing stance of the Trump administration. The Republicans do not have a filibuster-proof majority in the Senate, which will force them to negotiate legislation, outside of what can be passed through budget reconciliation.

If the Republican administration succeeds in implementing its preferred tax, immigration and trade policy, inflationary pressure will increase, leading to a stronger dollar and higher U.S. interest rates. An expansionary fiscal policy and a crackdown on immigration will put upward pressure on inflation, leading the Federal Reserve to slow down and perhaps reverse interest rates cuts. If the tax cuts prove extensive and spending cuts paltry, a wider deficit will put upward pressure on government debt and hence increase the risk premium on long-term government bonds. Tax cuts and deregulation have the potential to raise short- and medium-term economic growth, but large-scale tariffs (and foreign trade retaliation) and concomitant economic uncertainty may lead to a weakening of the economic outlook, at least in the medium term. Though unlikely given the legal-institutional autonomy of the Federal Reserve, a successful policy of putting pressure on the Federal Reserve to pursue a more dovish monetary policy could further undermine medium- and long-term financial and monetary stability. 

> U.S. fiscal deficits will increase further leading to a more rapid increase in federal government debt, particularly once economic growth converges to its medium-term potential of 2%. The administration is all but certain to make the 2017 tax cuts permanent and may cut other taxes, while at implementing only limited cuts to federal spending. an is in the White House. Federal spending only account for ¼ of federal spending, meaning that significant changes would be required to offset the fiscal effects of making the 2017 tax cuts permanent.

> The macroeconomic policy mix, particularly if combined with protectionist trade and hawkish immigration policies will be negative for fixed-income markets, given the potential for upward pressure on long-term interest rates. Provided protectionist policies do not prove too detrimental to economic confidence, an expansionary fiscal policy, highish interest rates and deregulation should provide a short-term boost to economic growth in the context of higher-than-anticipated inflation, which should benefit equities, broadly speaking. Moreover, deregulation, corporate tax cuts and a less hawkish anti-trust policy should benefit selected sectors, such as banks, fossil fuels, among others, while the repeal of ESG-related rules and legislation will be negative for ESG-related sector and equities.

A stronger dollar, higher (relative to baseline) U.S. interest rates and higher U.S. tariffs will have a negative effect much of the rest of the world, and particularly countries with large dollar-denominated debts. A stronger dollar will put greater strain on economies with larger dollar-denominated debt given the higher cost of servicing their debts and the strain a stronger dollar puts on their balance sheet position/ net worth. A stronger dollar also typically leads to a fall in commodity prices further hurting emerging and especially developing economies relying on commodity exports. While a stronger dollar and stronger U.S. dollar could help offset some of the increased financial distress, higher tariffs on U.S. imports would sharply limit the offset. Countries with net dollar obligations would take hit on both their capital account (lower financial inflows) and their current account (lower exports). This would be greatly magnified if the Trump administration were to impose exorbitant tariffs on imports from China, as this would slow Chinese growth. As China is the dominant trade partners of more than 120 countries around the world, emerging and developing economies would suffer due to reduced Chinese demand. Much will therefore depend on how extensive and how permanent U.S. tariffs will prove. Both the EU and China, the world’s second- and third-largest economies, are currently in a weak and vulnerable position and a trade war would likely push the EU into recession and could reduce already weakening Chinese economic growth by as much as half.

> Although recently, the relationship between U.S. valuation and commodity prices exhibited an unusual pattern, with dollar strengthen coinciding with higher commodity prices, this pattern is unlikely to hold in the future, outside the energy complex.

> China is the dominant trading partner of more than 120 countries. A significant slowdown in China due to U.S. tariffs would have a negative knock-on effect on the rest of the world. While most emerging markets will be able to ride the negative effect of U.S. economic policies due to their manageable foreign debt position and generally flexible exchange rates, many developing countries could face renewed financial distress, including emerging economies currently undergoing IMF reform, such as Argentina, Pakistan and many African countries

> The IMF projects euro area growth to recover from 0.8% in 2024 to 1.2% in 2025. A trade war or even just uncertainty about U.S. trade policy and the prospect of a transatlantic trade war makes this forecast look optimistic. The IMF also forecast Chinese real GDP growth to slow from 4.8% this year to 4.5% in 2025. However, thus far limited appetite for additional stimulus means that significant U.S.-China trade tensions, and particularly a 60% tariff on U.S. imports from China, could reduce Chinese economic growth by more than 200 basis points.

Why ASEAN Will Fail to Emulate the EU (2024)

Although ASEAN’s economic diversity and less than fully aligned security interests will hamper further significant progress towards regional economic and political integration, individually and collectively, the outlook for economic growth in the region ranges is fair-to-excellent, only Myanmar and Thailand excepted. ASEAN (Association of South-East Asian Nations) is an economic and political grouping consisting of ten South-East Asian countries. While the members share many interests, their economic diversity hampers the outlook for significantly greater economic integration and their differing geopolitical orientation will make it difficult to make further progress towards political integration, particularly in light of Sino-US geopolitical competition. Countries very significantly in terms of demographics, economic development and domestic-political regimes, ranging from liberal laissez-faire economies like Singapore to less non-market economies like Vietnam. Geopolitically, some countries are semi-aligned with China (Cambodia, Laos), while others are treaty allies of the United States (Philippines, Thailand). Compared to the most successful example of economic and political integration, the European Union, the region is economically more heterogenous, it is less aligned in terms of security, and it lacks important intra-regional leadership to drive regional integration. 

· ASEAN has ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam. ASEAN was founded in 1967 and its charter commits member to accelerate economic growth, social progress and cultural development as well as promote regional peace and stability.

· The population of ASEAN countries is almost 700 million. In purchasing power parity terms, ASEAN economies account for around 7% of the global economy. At markets exchange rates, however, ASEAN economies account for a far smaller share of global economic output, roughly equivalent to Japan or Germany.

· Several ASEAN countries are among the fastest-growing economies in the world. Economic growth is higher than in Latin America, Eastern Europe and the Middle East. The IMF projects Cambodia and Indonesia to grow more than 5% in 2024-29 and the Philippines and Vietnam to average growth of more than 6%. The ASEAN laggards, Brunei, Myanmar and Thailand will average real GDP growth of 2-3%. Unweighted average real GDP growth (ex-Singapore) is projected to be 4.4%.

.

ASEAN is a large free-trade area and it has various free-trade agreements with other countries, but both the ASEAN FTA and FTAs with third parties are largely limited to tariff-free market access for goods. All ASEAN members are part of ASEAN’s Free-Trade Area (AFTA). AFTA establishes a common effective preferential tariff of 0-0.5% among its members, meaning that ASEAN members largely trade goods duty-free amongst each other. But as an FTA, individual members continue to impose tariffs on trade with extra-ASEAN countries based on their national schedules. ASEAN also free-trade agreements with third countries, such as Australia, China, India, Japan, Korea and New Zealand. In 2020, ASEAN signed up to Regional Comprehensive Economic Partnership (RCEP), which also includes all the countries ASEAN has FTAs with, except India. Most ASEAN members are also members of Belt and Road Initiative in view of building connectivity, some countries are more wary of Chinese influence (Philippines, Vietnam) than others (Laos, Cambodia). Some ASEAN members are also parties to other, separate free-trade agreements. Brunei, Malaysia, Singapore, Vietnam, for example, are members of high-quality Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which goes way beyond lowering tariffs, compromises eleven Asian and Latin American economies and whose original purpose was to tie the United States more closely to East and South-East Asia, until Washington backed out of negotiations in 2017.

· ASEAN FTA (or AFTA) was established in 1992. However, Vietnam, Laos, Myanmar and Cambodia have not fully implemented internal preferential tariffs yet. In 1995, ASEAN adopted a Framework Agreement on Trade in Services and Mutual Recognition Agreements (MRAs) in order to make progress on liberalization of trade in services. But progress has been limited, leading to the liberalization and mutual recognition of a small number of selected professions.

· ASEAN has several FTAs with other countries, including ASEAN bilateral FTAs with Australia and New Zealand, China, India, Japan, Korea. In 2020, ASEAN signed on to RCEP, which foresees the liberalization of 90% of tariffs within the next two decades and is mainly focused on tariff reduction and common rules, but fails to tackle ever more important non-tariff barriers and other trade-related issues. As such, its economic benefits will be limited, except for allowing for greater goods supply chain integration across the region.

· ASEAN is not to be confused with Asia-Pacific Economic Cooperation (APEC), which 21 members, including the United States and China as well as ASEAN members, such as Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. APEC is committed to voluntary liberalization and open regionalism, meaning that trade and economic concessions are extended to all countries, including non-APEC members. APEC has made limited progress in terms of trade liberalization. 

Further progress on intra-regional economic integration will prove challenging given the high degree of economic and political diversity, including geopolitical outlook. In 2007, ASEAN member states signed a declaration pledging to establish an “EU-style community”. In 2015, ASEAN also launched the ASEAN Economic Community (AEC) with the aim of creating a common market, including further trade liberalization and regulatory harmonization as well as the establishment of the four freedoms, namely the goods, services, capital and labor. EU-style community can mean many things, but appears to be primarily focused on establishing an EU-style single market, guaranteeing the so-called “four freedoms,” namely the free flow of goods, services, capital and labor across borders. It may also imply the establishment of a customs unions rather than a more basic free-trade area, increasing alignment of currency and macroeconomic policies, and banking and capital market integration. Less ambitiously, ASEAN set a goal of establishing a single market (four freedoms) by 2015. This goal has been pushed back to 2025, but looks highly unlikely to be realized next year. 

· ASEAN economies are very diverse in terms of their level of development. Per capita income in purchasing power parity terms varies widely, from $132,000 in Singapore to $5,200 in Myanmar. This makes economic integration more difficult, particularly the free movement of labor.

· Although ASEAN is a free-trade area, intra-regional trade is limited, and members trade far more with countries outside the region, pointing to the importance of the region’s role in multi-national supply chains that supply goods to the United States, European and, increasingly, China.

· Not a single ASEAN member has more than one other ASEAN members as its top export market: Brunei (Singapore is 4th largest export market), Cambodia (none), Indonesia (none), Laos (Indonesia 3rd), Malaysia (Singapore 2nd), Myanmar (Thailand 1st), Philippines (none), Singapore (Malaysia 3rd), Thailand (Vietnam 5th), Vietnam (none). The United States, the EU, China, Japan and Hong Kong dominate the ranking of ASEAN members top-five export markets.

· Progress on monetary cooperation is in its infancy. Due to its low level of intra-regional trade, ASEAN is far from being an optimal currency area. Stable foreign-exchange rates require a broader alignment of macroeconomic policies, which is economically and politically difficult to achieve, given economic diversity, different economic structures and an eagerness to preserve macroeconomic policy autonomy.

Greater political cooperation and integration will also be hampered by the less than fully aligned security interests of ASEAN members, especially in light of intensifying US-China competition. As in the case of Europe’s greater economic homogeneity, at least in the early stages of integration from 1949/ 51/ 57 (NATO/ European Coal and Steel Community/ Treaty of Rome) to 1995 (Austria, Finland, Sweden join EU), ASEAN is much less aligned in terms of security. ASEAN predecessor organization, the Association of South-East Asia (ASA) established in 1961 by Thailand, Malaya and the Philippines, was partly driven by similar interests in terms of the Cold War, the right against Communism, including Communist insurgencies in Malaya and the Philippines. Today, however, ASEAN, unlike Europe, misses many of the features that facilitated European political (and economic) integration. ASEAN also lacks the equivalent of Franco-German leadership, a major engine of European integration. Europe also benefitted from the presence of an external security guarantor (United States, NATO). SEATO was never as cohesive and encompassing a security alliance as NATO and was ultimately dissolved in 1977. By contrast, ASEAN members are much less aligned in terms of security policies. Cambodia and Laos lean towards China, while the Philippines and Vietnam are effectively engaged in security competition with China, while the Philippines and Thailand are US treaty allies. This will make it difficult to find intra-ASEAN consensus in terms of internal political integration in view of diverging international security (and economic) interests. 

· ASEAN is broadly committed to upholding the status quo and object to China’s nine-dash line that claims most of the South China Sea. But the degree of security conflict with China in the South China Sea varies. The Philippines and Vietnam’s dispute are far more intense than those of Indonesia, Malaysia or Brunei. The Philippines and Thailand are US treaty allies. All of this makes substantial progress on political integration difficult, as ASEAN members will object to giving up autonomy, domestically or internationally.