Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times


May 11, 2017

Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times

by Tricia Teoh

“THE absence of good institutions and transparency in public undertakings, government procurement, and … the design of public policy has the potential to shake investor confidence” is how economist Shankaran Nambiar sums up the macroeconomic conditions of Malaysia.

In his latest book, Malaysia in Troubled Times, which compiles Nambiar’s articles in newspapers between 2014 and 2016, he deftly articulates his positions on issues. He grapples mainly with the question of “where is the economy headed towards”, which he asks numerous times across his pieces, an evident sign of his deep concern over the trends taking place in the country.

Nambiar articulates what many observers of Malaysian issues have struggled with: despite our economy not hitting negative growth, not being in danger of defaulting on sovereign debt and the fact that the central bank having adequate reserves to cover shortfalls, he states clearly that yes, indeed, we should still exercise great caution with respect to the Malaysian economy.

And why so? Various pieces indicate why observers should be worried – an outflow of foreign funds, the sharp decline of oil prices, which has in turn led to a growing federal fiscal deficit, and … “doubts on the efficacy of government linked companies”.

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When Malaysia is in trouble, follow Idris Jala and play the Guitar

The challenges facing Malaysia stretch beyond our borders, and here Nambiar wades through regional waters to help readers understand the dynamics behind the now-dead Trans Pacific Partnership Agreement, the Regional Cooperation Economic Partnership, and the Free Trade Area of the Asia-Pacific, which he highlights is indicative of China flexing its muscles in the region.

Malaysia, he says, “has a special, valuable relationship with China, which places it in an excellent position to help establish a stable security landscape in the region”. Of course, the “special relationship” we have with China would now be interpreted in a very different light today, given the many bilateral deals Malaysia has now signed with China. Apart from arguing for how ASEAN can build itself up as a stronger regional pact, it is also refreshing that he brings in Asean-India economic ties and goes on to push for greater Malaysia-India improvements in trade and investment, which apparently our neighbours Singapore and South Korea have put a lot more effort in than we have.

Above all, Nambiar is a faithful believer of Keynes, whom he quotes several times in the book, saying that “positive expectations and ‘animal spirits’ spur aggregate demand and economic growth”, and that “at the moment it seems that the animal within the economy is wounded”. He cleverly works his critique of the economy through metaphors such as these, but stops short of blatantly dismissing any efforts being made by policymakers to improve the economic conditions of the country. He could also have done more in providing solutions to what he considers to be ailing our economy.

Despite the nuanced tone of his writings, it is clear that he harbours silent frustration with public policies and their implementation in Malaysia. Although the book focuses mainly on technical economic matters, Nambiar also ventures into “getting the big picture right”. He questions Malaysia’s dismal performance in the Programme for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS). He emphasises the importance of good public transport, education, human resource development and healthcare. And perhaps most importantly, he questions whether our politicians and policymakers are truly connected with the economy “as experienced by traders, technicians, taxi driver and executives”.

It is now almost two years after one of Nambiar’s pieces titled “Do we need to create scenarios for a future Malaysia?” and yet it seems even more imperative to do so today. With the elections near, this is what policymakers ought to do. And if they are not, then citizens ought to instead, and demand that their representatives pave the way for the right future to actuate.

An imagined future has to be one that, Nambiar argues, goes beyond motherhood statements like “being united in diversity and sharing a common set of values and aspirations” that he considers merely “dreamy visions of the future”. One has to concretely build scenarios based on concrete issues such as income distribution, incorporating input from a “constraint approach” (what are the stumbling blocks?) as well as a “global basis approach” (how does Malaysia fit into this matrix based on global trends?).
It is on this note that the book hits the nail hard on its head. Nambiar’s voice that constantly urges and pushes for the creation of the “spirit of this big picture” reminds us that simply, there is none of this presently that so inspires. His is a thoughtful, objective and incisive perspective of a nation that could be much more – and his desires for a better, more productive, wealthy Malaysia are evident.

Policymakers and politicians serious about addressing challenges to the Malaysian economy would benefit from a thorough reading of Nambiar’s book. They should also take heed of his advice that in thinking of the long-term, they must be “realistic about the present state of affairs”. This would be a good first starting point.

Comments: letters@thesundaily.com

IMF on Malaysia–Report Card


May 3, 2017

International Monetary Fund on Malaysia–Report Card

by The International Monetary Fund

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Putrajaya–The Administrative Capital of Malaysia

The IMF conducts an Annual Review of member country economic situation. At the conclusion of the consultations the Executive Board considers the findings which are also conveyed to the Government. A Press Release is issued  together with access to the full staff report on the Fund’s website. The Report  is in the nature of a “Report Card”.

The text of the Press Release is reproduced below. The full report can be accessed and downloaded from  ::

http://www.imf.org/en/Publications/CR/Issues/2017/04/28/Malaysia-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44869

On March 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.

Despite a challenging global economic environment, the Malaysian economy performed well over the past few years. Notwithstanding the impact of the global commodity price and financial markets volatility, the economy remained resilient, owing to a diversified production and export base; strong balance sheet positions; a flexible exchange rate; responsive macroeconomic policies; and deep financial markets. While real GDP growth slowed down, Malaysia is still among the fastest growing economies among peers. The challenging global macroeconomic and financial environment puts premium on continued diligence and requires careful calibration of policies going forward.

Risks to the outlook are tilted to the downside, originating from both external and domestic sources. External risks include structurally weak growth in advanced and emerging market economies and retreat from cross-border integration. Although the Malaysian economy has adjusted well to lower global oil prices, sustained low commodity prices would add to the challenge of achieving medium-term fiscal targets. Heightened global financial stress and associated capital flows could affect the economy.

Domestic risks are primarily related to public sector and household debt, along with pockets of vulnerabilities in the corporate sector. Federal debt and contingent liabilities are relatively high, limiting policy space to respond to shocks. Although the household debt-to-GDP ratio is likely to decline, household debt also remains high, with debt servicing capacity growing only moderately.

Real GDP growth rate is expected to increase moderately to 4.5 percent year-on-year (y/y) in 2017 from 4.2 percent in 2016. Domestic demand, led by private consumption, continue to be the main driver of growth, while a drag from net exports, similar to 2016, will remain.

Consumer price inflation is projected to rise and average 2.7 percent y/y in 2017 on the back of higher global oil prices and the rationalization of subsidies on cooking oil. The current account surplus would be largely unchanged as impacts from an improved global outlook and higher commodity prices would be offset by the strength of imports on the back of a resilient domestic demand.

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Bank Negara Malaysia—in full control of the Pulse of the Malaysian Economy

Executive Directors commended the resilience of the Malaysian economy, which reflects sound macroeconomic policy responses in the face of significant headwinds and risks. While Malaysia’s economic growth is expected to continue in 2017, weaker-than-expected growth in key advanced and emerging economies or a global retreat from cross-border integration could weigh on the domestic economy. Against this background, Directors urged vigilance and continued efforts to strengthen policy buffers and boost long-term economic growth.

Directors agreed that the authorities’ medium-term fiscal policy is well anchored on achieving a near-balanced federal budget by 2020. The planned consolidation will help alleviate risks from elevated government debt levels and contingent liabilities and build fiscal space for future expansionary policy, as needed.

Directors recommended that the pace of consolidation reflect economic conditions and that any counter-cyclical fiscal policy measures be well-targeted and temporary. They noted that improvements to the fiscal framework, such as elaborating medium term projections and preparing and publishing an annual fiscal risks statement, would help anchor medium-term fiscal adjustment and mitigate risks.

Directors agreed that the current monetary policy stance is appropriate. Going forward, Bank Negara Malaysia (BNM) should continue to carefully calibrate monetary policy to support growth while being mindful of financial conditions.

Directors emphasized that global financial market conditions could affect the monetary policy space and should be carefully monitored.

Directors noted that the banking sector is sound overall and that financial sector risks appear contained. Nonetheless, they cautioned that potential pockets of vulnerability should be closely monitored. They noted that household debt remains relatively high, while in the corporate sector, there are emerging vulnerabilities in some sectors. Directors suggested that macroprudential measures be adjusted if needed.

Directors underscored the central role of macroeconomic policy and exchange rate flexibility in helping the economy adjust to external shocks. In this regard, they welcomed the authorities’ commitment to keeping the exchange rate as the key shock absorber. They recommended that reserves be accumulated as opportunities arise and deployed in the event of disorderly market conditions. Noting the authorities’ aim to improve the functioning of the onshore forward foreign exchange market, Directors urged the BNM to monitor the effects of the recent measures introduced in this regard, recognizing their benefits and costs.

They emphasized that close consultation and communication by BNM (Bank Negara Malaysia–Central Bank) with market participants will be essential in further developing the foreign exchange market and bolstering resilience.

Directors underscored that steadfast implementation of the authorities’ ambitious structural reform agenda is key to boosting long-term economic potential. They supported the emphasis on increasing female labor force participation, improving the quality of education, lowering skills mismatch, boosting productivity growth, encouraging research and innovation, and upholding high standards of governance.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

Abenomics: A Success?


May 2, 2017

Abenomics: A Success?

by The Financial Times

https://www.ft.com/content/62cc7d40-2e65-11e7-9555-23ef563ecf9a

When a policy is applied for more than four years, and consistently fails to produce the intended result, it is tempting to declare it a failure. Critics of Japan’s economic stimulus declare exactly that. They are wrong. So-called Abenomics has not failed, and it should be sustained, not abandoned.

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Critics of Prime Minister Shinzo Abe’s economic policy, which aims to combine monetary and fiscal stimulus with structural economic reforms, make a simple case. Abenomics began in the spring of 2013. It was supposed to revive growth and end two decades of on-and-off deflation. Four years later, the Bank of Japan’s preferred measure of inflation is up by 0.1 per cent on a year ago. It follows, the critics say, that the medicine has not worked.

It has indeed proved hard to ignite inflation in Japan. Since the financial crisis, low inflation has been a problem everywhere, from the US to the eurozone to the UK. But the simple diagnosis of failure ignores how much Abenomics has achieved, the difficult backdrop to these achievements, and the reality that the stimulus was much smaller than its critics imagine. Growth, running at an annualised 1.2 per cent, has been well above Japan’s underlying rate every year save 2014. The unemployment level is at a 22-year low of 2.8 per cent — and that figure understates how tight Japan’s jobs market has become. Every shop and restaurant in Tokyo seems to have a “positions vacant” sign, and many are scrapping 24-hour opening to save labour. Yamato Transport, the country’s largest logistics company, is raising prices for the first time in 27 years in a deliberate attempt to cut volumes to a level its network can handle. Rather than cutting costs, chief executives spend their time working out how to hire and retain staff.

After more than two decades when labour was cheap and abundant, Japanese companies are finding ways to cut back, reducing their lavish service standards rather than raising prices. But this can only go so far. Japan is primed for inflation. The struggles of the stimulus must also be weighed against the global economic backdrop. The plunge in 2014 in commodity prices, followed by the 2015 slowdown in emerging markets, leading to a sharp appreciation of the yen, were a terrible environment in which to generate inflation. Only with the election of Donald Trump as US president, and the subsequent rally in the yen above ¥110 to the dollar, is the global economy once again a support. Of all the obstacles to success, the worst was self-inflicted: a 2014 rise in consumption tax from 5 to 8 per cent. In theory, Abenomics involved a fiscal stimulus. In reality, this only ever happened for a brief time, in 2013. Over the past four years, Japan has significantly tightened fiscal policy. The predictable result was to halt momentum towards higher prices.

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Recently, the Abe government has realised its mistake and loosened the purse strings a little. It should continue to do so, ignoring foolish and arbitrary fiscal targets, until inflation finally does pick up. There have been policy failures over the past four years, but they all involved too little Abenomics, not too much. To break Japan’s deflationary mindset for good may take several more years. Workers are slow to demand higher pay and employers are reluctant to offer it. But that does not mean the effort to restore inflation has failed. Rather, it has made significant progress, in a difficult environment, where the policy’s champions often failed to act when needed. The prize is a revived Japanese economy.

 

Rethinking Labour Mobility


March 9, 2017

Rethinking Labour Mobility

by Harold James

http://www.project-syndicate.org

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

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PRINCETON – The past year will be remembered as a period of revolt against what US President-elect Donald Trump likes to call “globalism.” Populist movements have targeted “experts” and “elites,” who are now asking themselves what they could have done differently to manage the forces of globalization and technological innovation.

The emerging consensus is that people and communities displaced by these forces should be compensated, perhaps even with an unconditional basic income. But that strategy has many hazards. People who are paid to do meaningless activities, or nothing at all, will likely become even more disengaged and alienated. Regions that are subsidized simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve.

Thus, simple transfers are not enough. Humans are ingenious and adaptable, but only in some circumstances; so we must continue to search for viable opportunities that allow people to participate creatively and meaningfully in the economy. To that end, we should look to history, and study what happened to the “losers” during previous periods of rapid techno-globalization.

In the Industrial Revolution of the late eighteenth and early nineteenth centuries, technological innovation, especially in textile machinery, displaced skilled artisans and craft workers en masse, and left them deprived of any real safety net to cushion the blow. But, in retrospect, it is not obvious that governments could have done anything to compensate Silesian handloom weavers or rural Irish artisans. Although they were hard workers, their products were both inferior in quality and more expensive than what was being manufactured in the new factories.

Instead, many displaced workers emigrated – often long distances across oceans – to places where they could take on new forms of work, and even prosper. As the late Thomas K. McCraw’s brilliant book The Founders and Finance shows, America’s tradition of entrepreneurship is a testament to inventive migrants.

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In reality, freedom of movement for skilled labor across ASEAN remains a distant dream…There is little doubt that human capital development will be crucial to the ASEAN Economic Community’s feasibility. While globalization has made it easier for companies to fill positions by looking beyond ASEAN, continued reliance on such a strategy will be unsustainable.So what is stopping ASEAN governments from addressing this obvious obstacle to the economic community’s success?–http://www.cfoinnovation.com

To see the benefits of migration, we need look no further than Kallstadt, a town of small-scale farmers in southwest Germany where Friederich (Fred) Trump – Donald Trump’s grandfather – was born on March 14, 1869. He moved to the US in 1885 (his wife was also born in Kallstadt, and he married her there on a return visit in 1902). The father of the founder of the food giant Heinz (now the Kraft Heinz Company), Henry John Heinz, was born in Kallstadt as well, in 1811, and emigrated to Pennsylvania in the 1840s, to escape an agricultural crisis.

But just one century later, emigration was no longer an option for people whose economic activity had suddenly become obsolete, not least because most countries had imposed tougher barriers against migration. In the first half of the twentieth century, the most vulnerable producers were rural, small-scale farmers who could not compete with expanding food production elsewhere in the world.

This was especially true for European farmers, who responded to their sudden impoverishment and bankruptcy with the same sort of populist politics that featured so prominently in 2016. They formed and voted for radical political movements that blended economic and social utopianism with increasingly militant nationalism. These movements against globalization, which culminated in World War II, helped to destroy the contemporary international order.

In the aftermath of World War II, politicians in industrial countries found a different solution to the problem of displaced farmers: they subsidized agriculture, supported prices, and sheltered the sector from international trade.

In the US – which, tellingly, avoided the nationalist surge – this effort had already been embodied in the 1933 Agricultural Adjustment Act. In Europe, price maintenance and supranational protectionism formed the political basis for European integration in the European Economic Community, which would become the foundation for the European Union. To this day, the EU budget is overwhelmingly devoted to the Common Agricultural Policy, the system of subsidies and other measures to support the sector.

Agricultural protectionism worked well for two reasons. First, US and European agricultural products in this new regime were not fundamentally worthless, as handmade, technically inferior cloth was during the Industrial Revolution. American and European producers still fed the populations of rich countries, even if they did so at a higher cost than was economically necessary. Second, and more important, workers were able to change occupations, and many moved from the countryside to fill attractive, high-paying jobs in urban manufacturing and services.

Of course, today the threat posed by globalization extends precisely to these “new” jobs. Europe and the US have long attempted to support “losers” in manufacturing and services through various small-scale programs that do not, in fact, benefit many workers. For example, the US Trade Adjustment Assistance program, which was augmented under the 2009 Trade and Globalization Adjustment Assistance Act, and the EU’s Globalization Adjustment Fund are small, complex, and expensive measures to compensate displaced workers.

As a result, many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today. No one can deny that it is a waste of human and natural resources to prop up occupations that create unwanted or obsolete goods. Earlier generations had emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion.

Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people. But this kind of mobility – which is increasing in modern Europe, but not in the US – requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery.

The most important form of mobility is not physical; it is social or psychological. Unfortunately, the US and most other industrialized countries, with their stultifying and rigid education systems, have failed to prepare people for this reality.

 

Economists in Denial


February 27, 2017

Economists in Denial

By Lord Skidelsky*

https://www.project-syndicate.org/columnist/robert-skidelsky

*Robert (Lord) Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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View from above of the Bank of England. The central bank of the UK manages the sterling currency and regulates financial transactions. Banker to Central Banks.

Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.

Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.

It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.

Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. The reason is that most people are creatures of habit. Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand.

Central banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.

This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on recurring patterns of behavior will fail when something genuinely new happens.

Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of quantifiable risk fail when faced with radical uncertainty.

The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.

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Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” Likewise, many Brits are now more confident about the future.

This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat.

The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior.

Keynes’s economics was about the logic of choice under uncertainty. He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past.

There have been a few scattered attempts to meet the challenge. In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.” Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices.

The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.” Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.”

But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. Haldane, too, seems to put his faith in larger data sets.

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A Towering Figure in Economics–Lord Keynes

Keynes, for his part, didn’t think this way at all. He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. To offer meaningful descriptions of the world, economists, he often said, must be well educated.

 

Policy uncertainty threatens trade growth, says World Bank


February 22, 2017

Policy uncertainty threatens trade growth, says World Bank

Warning on protectionism and threats to trade agreements in Trump era

https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65

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Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president. But the report by World Bank economists, released on Tuesday, highlights the fragile state of one historically important engine of global growth — trade.

To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued. Michele Ruta, World Bank report co-author

The study avoids naming Mr Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president. It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth. To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued Michele Ruta, World Bank report co-author International trade has been growing below historic trends for the past five years. The 1.9 per cent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

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Prime Minister Justin Trudeau meets with U.S. President Donald Trump in the Oval Office at the White House–The Future of NAFTA

The team found that some of the reasons for the anaemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices. But in 2016 the principal change was a surge in uncertainty about economic policy. According to the World Bank’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016. The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017. “To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued,” said Michele Ruta, one of the authors. The World Bank team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 per cent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organisation or no new trade agreements been signed, international trade would have grown at just 4.76 per cent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity. But Mr Trump and his administration have said they want to unwind those international supply chains and bring them home. “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

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According to the World Bank team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth. “Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.