Shocking wins for democracy in India & South Africa, fixing the baby crisis, Britain’s economic future, and a flood of Chinese exports threatens developing economies.
These are, in my opinion, the most important stories that we need to talk about in this economic update, produced in collaboration with the Economist.
So, let’s dive into our first story right away, which is about
India’s shocking election result
In which prime minister Modi, unexpectedly lost the absolute majority his party had for the last ten years. But, thanks to his coalition parties, his government still has a majority, and so Modi can keep governing India.
So, then, why did India’s stock markets plummet upon the news?, and why is the Economist calling this a triumph for Indian democracy?
Well, according to the Economist, the stock market’s initial fall can be explained by the fact that ruling in a coalition will likely slow down or weaken some of Modi’s proposed labor reforms and manufacturing subsidies, which is bad for business.
On the upside, this outcome means that India is now less likely to become an autocracy for two reasons. First, Modi’s BJP party and their allies now lack the two-third majority needed to mess with the constitution. Second, while Modi’s authoritarian style helped him push through big reforms such as infrastructure investment, a digital identity system, and a reformed financial sector, the country now needs more politically sensitive reforms at the state and local government levels to grow further.
A coalition that considers multiple viewpoints could potentially coordinate these reforms more effectively. After all, as the Economist points out, India’s successful reforms of the early-1990s and 2000s were all made by coalition governments.
Indeed, as I will explore in my upcoming video about why India can never grow like China, I think that this election result could potentially push India on to a more sustainable, somewhat slower, development path such as the one followed by countries like the United States, Germany and Japan.
However, this story isn’t the only shocking, yet hopeful election, I’m closely monitoring, which brings us to
2 South Africa’s shocking election result
Where, after years of economic decline, rampant corruption, and increasing crime, the ruling party —the ANC— finally lost its majority, dropping from 57.5% of the vote in 2019 all the way to around 40% today.
Therefore, the ANC can no longer rule alone and has now announced that it will pursue a so-called government of national unity. According to the Economist, the ANC had two options based on which coalition parties it would choose: the path of left wing populism, or the path of centrist pragmatism and the hope of renewal, that it ultimately chose.
Despite South Africa’s dwindling economic importance, this choice has huge implications for the global economy, as South Africa still holds the title of Africa’s most industrialized economy, dominates the Southern part of Africa, and holds some of the worlds largest reserves of minerals like gold, platinum, and manganese.
So, what does a government of national unity mean for South Africa?
If the ANC would have followed the path of populism that initially seemed likely, it would have either teamed up with the firebrand Economic Freedom Fighters (EFF) which wanted to seize and redistribute farmland and nationalize mines, banks and other big companies, without compensation, or with the newly formed MK party of former ANC president Jacob Zuma, which also wanted to nationalize banks and businesses and reform the judiciary to prevent it from going after corrupt politicians.
But, since both these parties made unreasonable political demands— for instance the MK party wanted the current ANC leader, Cyril Ramaphosa gone— the second path, —teaming up with the main opposition party, the Democratic Alliance (DA)— is the path that the ANC has chosen, be it, under the umbrella of a so-called government of national unity which includes some other small parties like the Inkatha Freedom Party. The DA has a proven record of governing relatively well in places like the Western Cape, where it has a majority. This, along with their business-friendly policies, is why the Economist considered this path the most sensible option.
And, having started this channel in Cape Town, South Africa, I agree. While the DA’s record is far from perfect, and controversial in divided South Africa because it is sometimes still seen as a “white” party, there’s no denying that the Western Cape is one of the best run provinces. And, given the terrible state of public services in South Africa, I really don’t see how teaming up with the party of the legendarily corrupt Jacob Zuma or radical economic freedom fighters could lead to anything productive.
But given that teaming up with the DA was opposed by many in the ANC, President Ramaphosa initially indicated that he wanted to pursue a government of national unity, which included both the liberal DA and the radical EFF parties. But, the EFF quickly rejected this option because it didn’t want to work with the DA. So, it could actually also have been a smart ploy by mr. Ramaphosa to end up in a coalition with the DA, which he can now defend by stating that the EFF denied him his preferred option.
So, perhaps South Africa’s economy will finally see better days soon under new, competent leadership. This is a hopeful fate it may share with its former colonial master, where
3 Britain’s upcoming election battle
could mean that on July 4th Britain finally ditches the conservative Tory party that presided over years of relative economic decline.
Indeed, if the election was to be held tomorrow, the Economist’s election model predicts that the opposition Labour party would get well above the 326 seats needed for a majority.
This is a big change from 5 years ago, when the conservative party easily secured the majority over labour.
And while, like South Africa, Britain’s economy has become less important, I still believe this election is crucial because a change of government might just be what Britain needs to get out of its relative economic decline.
The Economist writes it believes that while Labour’s policies are still too timid, the left-wing opposition party is still better positioned to tackle crucial problems like housing and Britain’s relationship with the EU.
However, as we’ve recently seen in France, even if reformist-minded governments may look good on paper, they might pave the way for a far-right surge if they don’t deliver on high-minded promises. But, THAT election battle may need to be explored in the next episode, as the results are still very unpredictable. Similarly, I decided not to feature Mexico’s election story, where, as predicted by most models, President AMLO’s chosen successor Claudia Sheinbaum won by a landslide, which likely means the country will likely continue on its current path.
However, Mexico will still play a crucial role in the next big global story which is about how
4 India, Mexico and Brazil are taking on China’s exports
A headline which refers to the fact that, while emerging markets like India, Mexico and Brazil were hopeful that it was now their turn to replicate China’s manufacturing led growth miracle, they instead risk becoming consumers of a new flood of cheap Chinese manufactured goods, especially after the U.S. and EU announced a lot of new tariffs on Chinese imports.
The logical consequence of Western markets closing off is that even more cheap Chinese goods will find their way to developing economies, putting in danger their emerging industries.
Indeed, the Economist quotes Jorge Guajardo, Mexico’s former ambassador to China, as saying
“The biggest threat of Chinese overcapacity is to developing countries,”
Therefore, developing countries are now responding by seeking Western trade deals and imposing tariffs and other barriers on Chinese imports. However, these emerging countries will still need cutting edge Chinese technology to develop their own manufacturing industries, making this a delicate balancing act. For example, as India builds new barriers against Chinese imports, China is already retaliating, as The Economist quotes one Indian executive who says that China is quietly restricting Indian access to crucial solar equipment.
In response some developing countries are now trying to convince Chinese manufacturers to set-up local factories there, just as China convinced German, Japanese, and US firms to build their factories in China, decades ago. However, the Economist warns that developing manufacturing in key sectors like batteries, and electric cars may be challenging as the West has recently copied China’s strategy when it introduced its own subsidies to bring factories back home.
And yeah, I agree with the Economist there that developing manufacturing in some of these sectors will be hard in the current global environment. However, I would like to add that a Chinese and Western subsidy race might unlock brand new growth strategies for developing countries, where they could profit by importing these subsidized products while developing manufacturing capabilities in less trendy industries.
That is, if these countries are able to get their industries going before they get old.
Because, as you can see here in this graph, the number of countries that have a fertility rate below the replacement level of 2.1 is now already roughly one hundred, and is only projected to rise. As a consequence, the number of countries where the population is already shrinking will soon surpass 50, and will, inevitably continue to rise further.
This is why I think the Economist’s analysis about
5 How to escape the global fertility crisis
Is the final most important story about the global economy right now.
You see, desperate to turn the tide of falling fertility, countries are now spending massively on family benefits, that are, as you can see here, very expensive, costing about 3% of GDP for countries like the Nordics and France. A percentage that translates to roughly a million US Dollars per baby in France, while having only a limited effect.
Indeed, as you can see here, the only rich country with a birth rate that is above the replacement level is Israel. At the same time, big spending in the Nordics and France has just kept them around the same level as the US, which spends far less. Still, none of these countries have seen quite such a dramatic decline in fertility as South Korea, as its birthrate plummeted to just 0.7, meaning that by the end of the century, South Korea’s population is expected to fall by a whopping 60%.
So, why are spending programs failing to stop the fertility crash? In this cover story, the Economist argues that they largely failed because they got the underlying problem wrong. Most governments still think the main reason women have fewer kids is that they are more highly educated and thus want to establish a career first, meaning that they have kids too late in life and therefore have fewer of them. In response, typical schemes have aimed to make it easier for women to have babies and have a career, for instance by making childcare cheaper and offering generous tax breaks for every baby.
However, the Economist argues that the real reason for the decline is actually that younger, working class women are now having far fewer babies. Indeed, as you can see here in this graph, it is really that women from 15-19, and 20-24 have gotten far fewer babies, as education around this topic increased, and contraception has become more readily available.
Indeed, evidence from France, Israel, and Norway suggests that bonuses that target working class mothers specifically have been much more effective than bonuses for everyone. This may be why Russia, China, and Hungary are now introducing new baby bonus schemes that specifically target women below the ages of 30.
But, The Economist argues that governments should not try to convince poor, young women to have more babies, because they might undo decades of work spent trying to curb unwanted teenage pregnancies and to encourage women to study and work. Cash incentives for older, higher-income women won’t work well either, The Economist says, because they don’t seem to want many more babies than they are already having. Therefore, governments should spend a lot of that money on how to deal with population decline rather than to try to fully eliminate it.
And, yeah, I thought this was a really interesting take even though I don’t fully agree with it. Specifically, while I agree that giving baby bonuses to working class moms might not produce miracles in countries with average fertility rates like France and the US, I could imagine that this would be money well spent for countries with extremely low birth rates like South Korea. But, perhaps more crucially, given that even non-orthodox Israeli women have more than 2.2 children, I think this demonstrates that raising fertility rates to the replacement rate should be possible in rich countries, we just haven’t figured out how.
But, I’m sure that, when researchers figure it out, we can read all about in the Economist, which I highly recommend you check out here.