Crossroads (Toward Philippine economic and social progress)
Philippine Star, 14 December 2016


The international economy faces uncertain prospects in 2017. The march toward globalization and prosperity has been interrupted by a series of surprise events as 2016 is closing.

Uncertain and volatile times. These new events augur changes that will affect the international economic institutions, agreements and policies that have propelled the world economy since the post-World War II period.

As US president-elect Donald Trump forms his government, his key appointments to run the economy and international economic policy appear to go to billionaire business leaders and Goldman Sachs types. This presages that he will form a team of “dealmakers” after his own image.

It seems to be the clearest sign that the successful candidate for president who acts on impulse will remain close to that style of leadership as he assumes the mantle of actual power.

He has indicated the future withdrawal from the Trans-Pacific Partnership agreement. This could mean the death blow to a group of 12 member trading nations that had been vigorously pursued by the Obama administration during eight years of US economic diplomatic efforts to enlarge the scope of free trade.

Japan’s prime minister has already said that without the US as member, the TPP is meaningless. Hence, the clock toward more multilateral freer trade deals momentarily stops, or, new ways of multilateral trade without the largest economy in the world would prosper.

Trump has unsettled China by signaling that he could undo the “one-China” policy by talking to Taiwan directly. Is this the opening gambit in a new and rough bilateral trade relationship with China? Does this foreshadow a trade or economic war?

If so, the world trading system could contract before it enlarges again. The international economy would suffer from protectionism and trade contraction.

On the US domestic economic policy front, Trump has announced plans for a fiscal stimulus to increase investments through substantial tax cuts through incentives legislation. In addition, he is committed to undertake a new, hefty infrastructure spending program. These two measures are likely to fuel larger fiscal deficits, which could stoke inflation.

Moreover, even as these are welcome in stimulating further domestic economic activity, the US has already been undergoing a vigorous recovery to the point the US central bank was already considering an interest rate hike before the US elections.

In fact, the US economy is close to full employment. The unemployment rate of four percent of the labor force is considered an admissible rate in the context of full employment among macro-economists. Further economic stimulus under these conditions would fuel inflationary pressures.

Fed interest rate hike: a certainty. This is why the Fed – the central bank under Janet Yellen – is poised to impose an increase in the interest rate to hold back inflationary pressures and contain economic overheating.

If it decides on a mild increase at the first instance (rumored to be taken by the Fed this week), the process of rate increases would not stop there. It would depend on the scope and magnitude of expected inflationary pressures.

Any Trump administration moves to stimulate growth any further would be countered by Fed moves to modulate those inflationary pressures. Thus, high growth prospects could be followed by steeper interest rate hikes because the economy is already near full employment.

Such measures that the Fed might do could help the world economy if world trade were freer. In that case, the tightening of growth in the US would have a beneficial impact on the growth of international trade elsewhere.

But as constructed by the US under the new Trump administration – in Trump’s campaign promise, “America first” – world trade is likely to suffer a fall in growth.

These measures of the American central bank that are designed to restore macroeconomic order to the US economy will have strong impact on the economies of smaller countries (the Philippines included). We have already seen how the threat of the interest hike has caused the realignments of income and investment flows in the Philippine stock market.

As the saying goes, when the giant economy catches a cold, the small ones contract pneumonia. Of course, as far as it affects us, the Philippine economy today is in much better competitive and macroeconomic shape. Even the business process outsourcing (BPO) is highly cost-effective that it would take serious changes in regulations in the US to dislodge them.

The US Fed measures would greatly affect investment allocation and economic directions in the larger economies — Europe, China, and Japan all included. Whatever happens to these economies will have secondary implications on the Philippine economy, since all regions are important trading partners and sources of investment flows.

Economic uncertainty in Europe. The economic uncertainty in Europe is fueled by the drift in their own politics. Lately, these have been influenced by a sense of upheaval in the strength of extreme political views. Such political changes are made through the ballots in these countries which are all democracies.

The Brexit vote in the United Kingdom has brought new uncertainties. How far will it damage (or benefit) the British economy and the future of the European Union itself?

The recent vote in Italy – shortly after the US election – has led to the resignation of the sitting prime minister, as the vote rejected his proposals for economic reforms. The result also puts into question the future of Italy’s position within the European Union.

More important are upcoming major elections in France and in Germany. If these two elections lead to the rejection of the economic ties within the European Union, the prospects of unraveling of the European integration experiment will provide a major setback. Brexit has already weakened that integration.

There are future elections coming up in the other member countries where the same questions will certainly appear to threaten the standing of supporters of the European Union.

Any unraveling or reshaping of the European Union would have large implications on the world economy. Such changes will affect the volume of trade, finance, investments and labor flows and, in particular, economic growth.

Hence, overall, the world economy could move toward rough and less certain times ahead. The forces that pull nations apart could be made stronger than those that put them on more stable and more cohesive arrangements.