How the global economy is affected by geo-politics
Geo-politics shapes the way the world economy evolves, and its impact reaches far and wide. We are now at a crucial phase of geo-politics, which will influence how the century turns out in the history of human evolution. Our policy-makers and diplomats had better prepare ahead of time -- Bangladesh, because of its strategic and geographic location, is in a sensitive state in terms of trade and politics.
US President Trump accepted an invitation for a second summit with North Korean leader Kim Jong-un, to be held at an unspecified time in the future. This precedes a planned third summit between Kim and South Korea’s President Moon.
Domestic economic concerns have badly damaged Moon’s approval rating, which reached a high of 80% following the first summit with Kim in April. Moon, therefore, is likely to focus the North-South summit on increasing economic interaction with the North, in particular through enhanced road and rail links, as these have the potential to benefit South Korea’s economy while also demonstrating continued progress towards peace on the peninsula. Meanwhile, a second Trump-Kim summit will unlikely deliver any measurable progress given the persistent lack of agreement on “denuclearization.”
Kim’s decision not to include intercontinental ballistic missiles (ICBM) in the recent parade is likely to be a sign of his intent to shift the focus onto economic development, rather than indicating any genuine interest in “denuclearizing.” Nonetheless, although the US will have objections to any activity which undermines their sanctions regime, the continuing lack of provocations on all sides, and the more positive diplomatic language, will give Moon greater scope to boost economic projects and trade involving the North, particularly as China is also likely to support.
Meanwhile in the Middle East, UAE’s involvement in the Saudi-led blockade of Qatar and the war in Yemen has damaged investor confidence, and impacted Dubai, whose economy is dependent on trade, services, and tourism. To boost the economy, Dubai’s business elite will likely attempt to lobby Abu Dhabi -- in order to make Dubai more attractive to foreign investment. In particular, they are likely to request that visa and residency restrictions are loosened to boost Dubai’s property market. The economy may also worsen further if US-Iran tensions rise or if the Houthis successfully launch a missile at Dubai, which will become more likely as the group comes under increased pressure in northern Yemen.
While in South America, former president of Brazil Lula da Silva, who is currently serving a 12-year prison sentence for corruption, formally confirmed that Fernando Haddad, the former mayor of Sao Paulo, would run for President for Lula’s Workers Party (PT). Lula’s move also came after Jair Bolsonaro, the right-wing front-runner in the elections, was stabbed by a left-wing activist. Bolsonaro was badly injured, and is unlikely to take part in any further campaigning. Although polls showed the attack boosted support for Bolsonaro, his absence from the rest of the campaign will reduce his ability to win over undecided voters. This means the election is increasingly likely to return a centre-left president and governing coalition, which will put a greater emphasis on redistributive tax and spending policies, while favouring greater state intervention in the economy.
In the continent of Africa, the Ethiopian Investment Board (EIB) removed restrictions on foreign investment into its logistics sector. Most significantly, this will enable international logistics service providers to own up to 49% of joint ventures with domestic investors. Increased foreign investment is crucial, as Ethiopia is experiencing a shortage of foreign reserves, which is valued at 2.2 months-worth of imports by the IMF. Lowering the costs and improving the efficiency of logistics solutions will also boost the overall competitiveness of Ethiopian exports, and will attract further investment in manufacturing.
However, when it comes to Africa, the event having most potential impact in world economy is perhaps the Forum on China-Africa Cooperation. Chinese President Xi Jinping welcomed dignitaries from 53 African states to Beijing for the seventh Forum on China-Africa Cooperation (FOCAC). During the Forum, Xi Jinping announced China’s intent to spend $60 billion in Africa over the next three years. $15bn of this will be allocated for grants, interest-free or concessional loans to Governments, $20bn is reserved for credit lines, $5bn will support African manufacturing, and private Chinese companies will be encouraged to provide the remaining $10bn. The 2018 FOCAC summit shows policy continuity rather than change, as China had also pledged $60bn in the 2015 summit. Xi Jinping also emphasized China’s continuing commitment to improving infrastructure by integrating Africa to its Belt and Road Initiative.
Most African heads of state will welcome China’s pledges to continue to provide loans and grants, which will help meet their own domestic goals. The lack of conditions attached to the Chinese loans mean that many states will continue to turn to China for finance, especially for infrastructure projects. South Africa’s president, Cyril Ramaphosa, also said that China had expressed interest in helping Africa manufacture more value-added goods, which would diversify and modernize regional economies -- although investment is likely to continue to focus heavily on infrastructure projects for now.
In addition, the summit showed that China is responding to its critics by placing greater emphasis on the sustainability of projects, and in “green” development and environmental protection, which will help to address the rising domestic criticism of Chinese investment that has occurred in some countries in the region.
The global economy is opening up, and new partnerships are being formed each day to take advantage of the free market economy. We have seen our peers India, Malaysia, and China take full advantage of global trade and technology transfer. It is time Bangladesh started playing the geo-political game.
Mamun Rashid is an economic analyst.