The world as we know it has gone off balance: It needs new economic ideas

Now, almost four decades and some economic crises later, it seems time once again for a change because it’s no longer the world “as we know it." 

However, there is no certainty what this change will look like, given the bewildering menu of choices and the resistance mounted by entrenched policymakers. This might be an opportunity for India to provide the world economy with a different model.

There has been a spurt in economic commentary about how traditional policy formulations are not working (read Jake Sullivan’s 2023 remarks at Brookings Institution, tinyurl.com/4nm5hsx6), battered first by the 2008 financial crisis and then by the covid pandemic. 

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The magical ‘LPG’ formula of the 1980s and early 1990s—liberalization, privatization and globalization—is now seen as broken, considering the widening economic inequality across most economies, accompanied with stagnant real wages for large parts of the global workforce. 

Authoritarian and right-wing politicians have seized on this trend and distorted it to meet their narrow political interests, even if that meant jettisoning traditional ideological positions. The best place to find some of these signs is the current campaign for president of the US. 

Barring the unintended moments of levity, it provides multiple signposts indicating that the world we knew—through its conventional ideological positions—is inexorably changing.

Former US president Donald Trump exemplifies the departure from the accepted normal, having announced that his administration, if voted to power, would levy a uniform tax on all imported goods. 

Trump is contesting on a ticket from the Republican party, which, true to its conservative credentials, has traditionally advocated free markets and free trade. 

In his first term (2016-2020), Trump even invoked national security to impose high tariffs on steel imports; this had the unintended consequence of inconveniencing steel consuming industries, which employ more people than steel manufacturers. 

He has now proposed the Reciprocal Trade Act, under which the US will impose tit-for-tat import levies on goods from countries that tax American goods. 

In a video recording, he said: “If India, China, or any other country hits us with a 100 or 200% tariff on American-made goods, we will hit them with the same exact tariff. In other words, 100% is 100%."

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Irony thrives in the shifting sands of politics: On the other side of the aisle, pejoratively called “the left" by Republicans, Democratic party candidate Kamala Harris has declared herself a “capitalist."

Established, US-based conservative think-tanks (like Heritage Foundation) have been trying to walk the fine line between defending free trade while not appearing to be critical of Trump’s protectionist ideas. 

Out of this confusing miasma has emerged a boutique, right-wing think-tank called American Compass, which is closely aligned with Trump’s running mate J.D. Vance and some of Trump’s economic advisors; this organization is now challenging the conventional Republican touchstones of free markets, small government and tax cuts for large businesses.

Another contra indicator comes from a recent working paper authored by three economists at the International Monetary Fund. The paper has examined 4,500 election manifestos for 720 national elections, held across 65 nations during the 1960-2022 period and concludes that there is clear evidence of a growing inclination for fiscal expansion rather than fiscal restraint. 

This is true for both advanced nations and emerging economies. Interestingly, the paper observes a markedly reduced discourse around fiscal restraint in advanced economies, down by almost a half since its peak in the 1980s. 

Specifically, over the past two decades, conservative parties are evincing increasing support for fiscal expansionism, accompanied by reduced support for fiscal restraint.

Some evidence of these crossed wires is also visible in India. The government’s social welfare expenditure for 2023-24 was ₹23.5 trillion, against ₹11.39 trillion in 2017-18, growing at a compounded annual growth rate of 12.8% over six years. 

Likewise, India’s debt-to-GDP ratio has jumped from 66.6% during calendar 2014 to 81.6% in 2023, and is expected to further rise in 2024. The increase in welfare spending has occurred despite the ruling party’s rhetoric against freebies and doles.

While there can be no argument in support of profligate fiscal behaviour or continued high sovereign indebtedness, it is also true that austerity measures and tight fiscal disciplinary targets are viable only when the economy is humming near full capacity, with near-full employment and moderate inflationary impulses.

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The reality is that Indian politicians on the right have been forced to pursue a counter-intuitive, welfare-centred economic policy today because their survival instincts are perhaps sharper than those of entitled economists, privileged businessmen or co-opted bureaucrats.

Indian politicians should perhaps be using these same intuitions to develop a unique, made-in-India economic model that acknowledges the obsolescence of old models by being truly progressive, socially just and climate friendly.