DAVOS, Switzerland (Reuters) - As governments grapple with the global crisis, politics has taken on central importance in determining the course of the world economy -- and political risk is more significant than ever.
Two leading experts on the financial crisis and its political dimensions -- RGE Monitor Chairman Nouriel Roubini and Eurasia Group President Ian Bremmer -- gave exclusive answers this week to Reuters questions on the key risks for 2009 and beyond, and the countries to watch.
Q - Is there likely to be a trend toward greater protectionism and nationalist economic policies around the world in 2009? What will be the implications for the global economy?
Roubini - Protectionist pressure will become more severe if the global economic slump is more protracted and deep. Certainly Doha is dead as multi-lateral trade liberalization is impossible. Protectionist tariff actions have already started to emerge in places such as Russia and India and they may spread further. Trade-distorting subsidies are more likely than tariffs (see the rescue of Big Auto in the US).
Currency tensions -- for example between the U.S. and China -- could escalate into trade wars. One also needs to worry about financial protectionism as a backlash against sovereign wealth funds and even FDI that may take place.
The new U.S. administration is dominated by pro-globalization figures (such as Tim Geithner and Larry Summers), but Obama’s choice for Labor Secretary and U.S. Trade Representative, and the ongoing pressures by trade unions, counter-balance these free-trade leaning forces.
And the fact that the new Treasury Secretary Geithner used the dirty M-word against China points to the risk that the fight about how much the RMB should further appreciate will turn into a trade war. Certainly, a China worried about the collapse of its exports and a hard landing may be tempted to have the RMB depreciate, or certainly not appreciate further.
Bremmer - There will be a heavy nationalist influence on economic policies globally this year because the overwhelming priority among political players will be to stimulate economies, growth and job creation. These are “national” projects. Governments will appeal to national pride to maintain domestic support. In Iceland, politicians are calling for a return to local traditions of strength and self reliance. In Russia, economic policy is intended to maintain Russia’s new strength. In America, President Obama is calling for shared sacrifice and an “era of responsibility”.
We will see austerity programs all over the world this year. Austerity breeds populism, but populism can easily breed protectionism in any country with significant exposure to international markets. If one country finds political advantage in throwing up a wall to protect a vulnerable industry or economic sector, other governments will have a political incentive and justification to do the same. The West has preached the virtues of free trade and free markets for years. Now, many in the developing world can cite massive state spending by Americans and Europeans to justify kick-starting their own economies, including by protectionist measures.
All that said, worries about global trade will be secondary in 2009 to other more pressing domestic questions. The risk of a protectionist wave is a longer-term problem. Q - Where is the oil price going in 2009, and what will be the political and social consequences?
Bremmer - In July, oil hit $147 per barrel. We got “drill baby drill” and a sense of urgency to investment in alternative fuels. Oil has now fallen to $44 per barrel. That undermines much of the political momentum behind both.
It’s also bad news for oil producing states like Venezuela that haven’t handled their account balances very well. It adds pressure on a Russian government that finds itself drawing heavily on the revenue amassed as reserves over the past six years. So-called stabilization funds may yet be used for actual “stabilization”. High inflation, unemployment and subsidy spending leave Iran in less-than-ideal economic shape, but its government has done a much better job than Venezuela of maintaining oil output levels.
But we can’t remain bullish on lower prices indefinitely. We see a lack of investment in infrastructure and exploitation in many countries. There are continuing geopolitical tensions in the Persian Gulf, the Caspian, West Africa, and other hotspots. Output is likely to fall over the longer term in Mexico, Venezuela, Russia, and elsewhere.
Roubini - In the short run, the demand destruction in the global demand for oil will keep prices low and hurt a bunch of unstable petro-states. These petro-states should become less aggressive facing fiscal and financial pressures; but some may be tempted to convert the domestic anger triggered by economic malaise into an aggressive foreign policy stance. Over the medium term, oil prices will sharply rise again once the global economy recovers. The return to potential growth will imply rapidly rising demand from urbanizing and industrializing China, India and other emerging markets. Meanwhile, the supply response will be much slower as low prices in the short-run lead to less investment in new capacity. In addition, as peak oil factors take hold, unstable petro-states won’t invest enough in new capacity and even Middle East states will decide it is better to keep more of the limited and finite reserves of oil in the ground for future generations. This suggests the importance -- for oil importing countries -- to invest in alternative and renewable technologies as a new oil shock looms.
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