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Political Economy in a Changing World Where the world goes in 2016?

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The year 2015 assumed significance from many events; some were positive while some augured ill for the future. But this is far from a simple method to state the condition or group different happenings. When the deal between the P5+1 and Iran was struck, there were jubilations in Iran but Israel and Saudi Arabia could see insidious clouds covering their horizons in the near future. When the price of oil tumbled to unprecedented lows, the importers were happy but the exporters gloomy. China resumed its decline — albeit slight — and was a constant cause of worry for the whole world but its arch competitor i.e. the United States, will always treat such news with a smile. So, it turns out that there is no good or bad news; it is good for some and bad for others.

Now comes the year 2016, the world has pirouetted another round around the sun. The positions and scenarios of different countries look quite different in the coming years due to umpteen factors but in this convoluted game there could be delineated some factors around which others rotate. The nucleus here is the economy. How can we judge a country’s strength? Obviously, through its GDP. How does GDP grow? Through consumption, investments and exports along with government spending. It is through the money that comes with a strong economy that you can buy aircraft, build artillery and make big budgets to support defence hence effulging on the international horizon with a bedazzling light.

The aforesaid factors can be divided into two categories: International Business Politics and International Security under the umbra of which comes security and military intrigues, alliances, etc. These two [branches of International relations] are not mutually exclusive but are cohesively intertwined. Any event happening under the rubric of international security affects the business climate and the converse is also true. This article explores some of the factors, issues and developments that are going to shape or guide business and security in 2016.

US interest rate and its economic health

United States of America is the biggest economy — $17trillion — of the world. With its latest Trans-Pacific Partnership (TPP) deal successfully carried out, it has the prospects of becoming more invincible than ever. But things at the surface are far more serene than that are found if one peeps into financial commotion sparked by prospects of low world growth; the phenomenon for which many countries and factors are responsible. On 15th December 2015, the US raised its interest rate by 0.25 percent after 8 years i.e. after the financial crisis. The new interest rate is 0.25-0.50 percent. Howsoever simple it may seem, it does have worldwide ramifications. But one thing is certain that it shows that the economic health of the US is good and that the Federal Reserve wants to contain growth slightly so as to avoid inflation (which is below the target of 2%). The job data from December 2015 show a whopping increase of 292,000 according to the Bureau of Labor Statistics. So far so good! This surge in interest rate bodes well for some countries and is a bad omen for others. As interest rates were low i.e. 0.00-0.25, many companies and countries have borrowed heavily in dollars but now all will have to embrace the effect of this rate hike.

For emerging economies it’s not good news because since the world commodities are traded in USD, countries like Brazil will feel an upward pressure as they will have to use more currency i.e. Brazilian real, to buy the same amount of, let’s say, oil or other commodities like gold and copper, etc. Its currency has lost 31% against the dollar and inflation is at its highest.

This was just one example. As commodities are traded in dollar and there is a negative or inverse relationship between the value of dollar and price of commodities, this rate hike is going to aggravate things in 2016 for emerging economies as well as Europe which is already struggling with debt and deficit crisis alongside an influx of refugees.

For Pakistan, with already low-value exports and a little forex reserves, this is a precarious situation. Due to country’s economic performance and rising inflation, Pakistani rupee is already very weak and, given this latest hike, one can expect a plunge in exports hence reducing foreign exchange reserves and creating further problems.

Headwinds ahead

Low demand for American products due to strong dollar and increased interest rate is having a two-way effect on US economy. While investors have been moving to US for higher returns as banks all around the world are inclined to reduce interest rates — BOJ recently reduced its interest rate to sub-zero levels — the consumer demand, however, for their products is suffering due to strong dollar. China is also bearing the brunt as investment of billions of dollars has been migrating to US for internal reasons (low economic growth) and externally by the US interest hike.

Latest is this that Federal Open Market Committee (FOMC), which is the monetary policymaking body of the Federal Reserve System, has hinted that they will not be going for an interest rate hike in March meeting. The language which FOMC uses is very critically analyzed by markets all around the world and this time they said: “It is closely monitoring global economy and financial developments” which insinuated that March may not see another rate hike.

Companies have also been suffering. Apple Inc. due to currency changes say that for every $100 in 2014, they are now getting $85 as more than two-third of Apple’s revenues is generated outside the US.

US job data

Recent data released by US Bureau of Labor Statistics show that in January the payroll increase was 190,000 that 100,000 less than the previous month i.e. December. But Federal Reserve Chair Janet Yellen has iterated her stance that anything more than 100,000 is good for the economy.

A difficult decision

Now Fed faces a very difficult decision which is to be made in their next meeting i.e. March, whether to increase the rates or make true the current sentiment of the markets which see no rate hike now, at least in, the next meeting.

My educated guess is “no rate hike”.

Russia’s political intrigues and declining economy

Russia, which was among the “Great Powers” of Europe and which has always played a significant role in world affairs, is again active — rather aggressively. First, in 2013 when it gave vent to its expansionist adventure (the annexation of Crimea), it attracted the world’s ire in the form of crippling sanctions. And now with its foray into Syria, it is again in the limelight for all the bad reasons.

Russia and West have a chronic political tussle. Both have, since the 18th century, assayed to control more and more resources and have been engaged in a fierce competition to accomplish this ambition. West meets its energy needs from its imports from Russia. Western Europe accounts for almost 80 percent for Russia’s exports. Notwithstanding the sanctions imposed by Europe and US on Russia, its exports to Europe in 2015 rose by 8 percent to reach around 159.4 billion cubic metres as compared with 146.6 in the previous year.

Such are the ways of the governments. Anyhow, besides bearing huge losses owing to sanctions and its political involvement in the Middle East, Russia is suffering also due to low oil prices and its expenditures on providing weapons first to rebels in Eastern Ukraine and then to Syria in support of Assad. At present, a very strange game is being played on the ground in the Middle East. All the players: USA, Saudi Arabia, Turkey, Iran, Russia and the rebels; and the ISIS, have their ‘vested’ interests.

Alliances are formed when these interests ‘converge’ at one point and it is possible that allies at one issue are enemies on the other. USA is training Iranian soldiers to fight against ‘Daesh’ in Syria and Iraq, however, when it comes to nuclear proliferation, they both are poles apart. The Syrian government is, on one side, fighting against the rebels but in their fighting against ISIS, they are on the same page. Saudi Arabia is also backing up the rebels to topple al-Assad regime. The reason for which Russia has decided to jump into this maelstrom of sectarian, religious and cultural mix is that Syria holds the key to a pipeline which the West wants to build in order to break its dependence on Russia. West aspires to build a pipeline that would get it gas from Qatar; passing through Saudi Arabia and up to the north where Syria will allow it to open in the Mediterranean Sea from where it will make a beeline to Europe. While the pipeline was being planned, Assad realized that instead of constructing a pipeline from Sunni-majority regions, why not go for Iran-Iraq-Syria pipeline? Russia, no fool, anticipated this and wanted to control the gas supply no matter from where it is operating hence its interest in Syria and backing of Shia community i.e. Iran and Assad and therefore such turbulence regarding, what has now become, the wretched Syria, an open battleground for anyone.

All this links once again to economics. If Russia is not able to keep Europe in its hand with gas and oil, it will suffer badly in economic terms which can — or would definitely — lead to its collapse. Saudi Arabia is another key participant as it has started the perennial oil war in order to cripple Russian and Iranian economies.

China: everyone’s concern

China, currently, is the apple of everyone’s eye; not because they love it but because it’s only in China’s betterment that the world can flourish. This is again due to the fact that China is the biggest exporter to many countries and that its population of 1.357 billion people presents a huge market for companies like Apple to cater. Moreover, China has been contributing heftily to global GDP — 16.6% in 2014. But recently China has ignited global fears because of its expectations of low growth (which is also very high when compared to other countries, it was 6.7% last year as per the data released few weeks back by China).

If anything happens in China, the world markets react very swift, and intense. There are many examples but let’s start with the recent stock market fiasco. It all started when concerns over China’s GDP growth started haunting investors and they, panic-stricken, started to suck their money back from the markets sending ripples all over the world and markets falling even to 2%.

Data manipulation

China is also accused of forging data and stats. Back in 1998, when Asia was hit by a severe financial crisis, Chinese data showed a growth of about 7.8%. Due to this statistical manipulation analysts have now resorted to look for other measures such as container traffic, factory output and production and consumption patterns.

China in 2016

Due to the Trans-Pacific Partnership, most of China’s outsourcing will shift to Vietnam. The Yarn-Forward Rule is going to exacerbate China’s already dwindling economic growth. China is showing signs of rising unemployment; construction sector lost 15 million jobs. Moreover, more chances and options now exist for investors; wealth managers are moving online to deal directly with investors and regulatory changes that allow companies to 100 percent own their investment management funds. However, ‘One Belt, One Road’ project can do wonders for it and can literally connect it to the whole Eurasia; maritime and by road, both.

China will also need to pump up its growth in order to encourage the investors as for now more than $116.7 billion have been drained out of China according to the State Administration of Foreign Exchange (SAFE) and more than half of it went to US.

If China is to live her dream of becoming the superpower or stand abreast of USA, it needs very quick and serious undertakings to do.

So, what a convoluted mess the world is? Or rather euphemizing this phrase, the world is confusingly connected and integrated; any change anywhere can have multiple effects for different countries — an intertwined web the strings of which are intricately linked.

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