July 2022

Accuracy Talks Straight #5 – Economic point of view

Hervé Goulletquer
Senior Economic Advisor, Accuracy

Liberal revolution and reasonable evolution

The recent legislative elections in France highlighted once again the discontent of the electorate in numerous countries with the development of their environment. Almost 60% of French voters listed on the electoral register made their choice… not to choose (non-voters, blank votes and spoilt votes) and almost 40% of those who did cast a ballot did so in favour of political organisations (parties or alliances) that are traditionally anti-establishment (the Rassemblement National and the Nouvelle Union Populaire, Ecologique et Sociale).

If we take a short-term focus, finding the reasons for this mix of pessimism and ill-humour—confirmed as it happens by a stark contraction of household confidence—proves to be quite simple. The net acceleration of consumer prices and the war at the European Union’s border, both phenomena being inherently linked, are obvious reasons. These upheavals, the gravity of which should not be underestimated (as we shall see), combine and indeed amplify a general disquiet that has been solidly in
place for some time.

Without needlessly going too far back, we cannot fail to recognise that over the past 15 years the world has experienced an entire series of events that have contributed if not to a loss of our bearings, then to the questioning of the way we perceive the environment in which we are evolving.

Let us list some of these events, without looking to be exhaustive:

• the financial crisis (2008)

• the swing between the USA tending to retreat from global affairs and China, up to now, being more and more present (the new silk roads in 2015), with Europe in the middle trying to find itself (Brexit in 2016)

• the change in direction of US policy towards China (distrust and distance from 2017)

• Russia’s challenging of its neighbours’ borders (2008, 2014 and of course very recently in February this year)

• societies becoming more fragile (the Arab Spring in 2010–2011, the French Yellow Jackets in 2018, the assault on Congress in the USA in 2021, the Black Lives Matter movement in 2013, the refugee crisis in 2015, the Paris attacks in 2015)

• the rise of the environmental question (from the Fukushima accident in Japan in 2011 to a more complete realisation of climate change from 2018, with Greta Thunberg, among others)

• an economy that does not work for the benefit of all (the Panama Papers in 2016 on tax avoidance processes), against a contrasting backdrop of only passable, if not mediocre, performance at the macroeconomic scale but more dazzling performance at the microeconomic level (cf. GDP, and therefore revenues, vs the profits of listed companies)

• a pandemic crisis (COVID-19) highlighting the fragility of production chains that are too long and too complex (‘just in case’ taking over from ‘just in time’ but with what economic consequences?), not to mention the crisis linked to humanity’s abuse of Mother Nature

• the political and social question (the need to protect and share wealth)

It is on these already weakened foundations that the most recent events (inflation and the war, to put it simply) are being felt as potential vectors of rupture, similarly to potential catalysts of change that were until now latent. This rupture could take two forms.

First, and based on a deductive approach, there is the risk that geopolitical tectonic plates, to quote Pierre-Olivier Gourinchas, the new chief economist of the IMF, take shape, ‘fragmenting the global economy into distinct economic blocs with different ideologies, political systems, technology standards, cross border payment and trade systems, and reserve currencies’. The political landscape of the world would be drastically transformed, with the economic destabilisation that would result from it, at least in the beginning.

Then, and based on an empirical approach drawn from Applied History (the use of history to help benefit people in current and future times), there is the tempting parallel between the current situation and the situation that prevailed in the second half of the 1970s. At the time, the ingredients were episodes of war or regime change in the Middle East and a striking rise in oil prices. The consequence was twofold: the onset of spiralling inflation and a change of regulation, at the same time less interventionist and Keynesian and more liberal and ‘Friedmanian’: less systematic drive for budgetary activism, less regulation of the labour market, privatisation of public companies and more openness to external exchanges.

Let us delve into this second topic – or at least try. In the same way that correlation does not mean causation, parallel might mean trivial! By what path would comparable causes produce a change in the conduct of the economy, but in the opposite direction?

Is it not time to foresee a return to more voluntarist economic policies instead of prioritising laissez-faire economics? Yes, of course, but we must understand that this
aspiration derives more from a reaction to a general context considered dysfunctional rather than from the search for an appropriate response to the beginning of snowballing prices.

Public opinion (or those who influence it) seems to show dissatisfaction, with the source
of the problem behind it lying in the regulation in place today. This leads to an emphasis
on an attitude that favours the alternative to the current logic: goodbye Friedman and hello Keynes, nice to see you again!

Nevertheless, beyond the causalities and their occasional loose ends to be tied up, the aspiration for a change in the administrat ion of the economy remains. The keywords might be the following: energy transition and inclusion. That means cooperation between countries (yes to competition in an open world, but not to strategic rivalry); reconciliation between public decision-makers, but also private ones, and the various other actors of economic and social life (the stakeholding); and the return to a ‘normal’ redistribution of wealth from the most to the least privileged.

To paraphrase Harvard University Professor Dani Rodrik, a globalised economic system cannot be the end and the political and social balances of each country the means; the logic must be put in the right order (a return in a way to the spirit of Bretton Woods).

In this way, at least we can hope, the global economic system will not fragment and inflation will be contained.

At least in the West, citizens and political leaders should align their aspirations and their efforts in this quest. Will businesses follow them? Will they not have something to lose, at least the largest of them?

We must of course raise the difficulty that may exist in reconciling the economic globalisation experienced over the past 30 years or so and the values that now prevail in society.

This requires adaptation, but without opposing the behaviour of the past and the aspirations—most certainly lasting—that have emerged. In the future (far ahead!), there will be no economic success in a world made inhospitable by the climate or by politics.

It is possible to ‘make some money’ occasionally by optimising customer, supplier and employee relationships, but taking a more long-term view, a ‘functional’ planet and ‘calm’ societ y are prerequisites.

Maybe we too easily tend to oppose market logic head-on to state and societal logic. Doubtless, it is more a question of positioning the cursor in the right place based on the changes observed or foreseen. That is where we are today; it is more about evolution than revolution!

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