In terms of its poor governance, dysfunctional politics and the direction of its economic policies, the US is increasingly resembling large and troubled emerging markets like Brazil, Russia and Turkey.
It became clear during my many years working at the International Monetary Fund that weak economic governance was the principal cause of dysfunctional emerging economies’ repeated bouts of poor performance.
Often in these countries a handful of oligarchs secured influence over the government, and economic policy was made mainly in their interest. In some important ways the US is starting to show qualitative similarities with these economies in the developing world.
Donald Trump’s cabinet is replete with ‘elites’. The president appears to have a predilection for promoting regressive healthcare and tax policies. Investment banking interests have seemingly exerted undue control for some years over the US Treasury secretary. Special interest groups, likewise, often appear successful in blocking legislative initiatives that a majority of the public might favour.
Another weakness of the emerging economies is their general lack of market competition and the dominance in their economies of a handful of conglomerates. The US is steadily drifting in that direction. It is estimated that two-thirds of all US economic sectors today are much more concentrated than they were in the 1990s, while the country’s antitrust legislation founders in the face of unchecked buying sprees by leading technology companies.
If there is one feature which emerging markets share, it is their policy-makers’ distrust of free trade and their fondness for high tariff walls that benefit the favoured few.
Again, the US administration appears to be moving in this direction. Trump is championing a protectionist ‘America first’ strategy and casting off the global leadership role which the US held for the last 70 years in favour of a unilateralist philosophy.
Economic and financial market ruin in emerging economies is often presaged by their disdain for disciplined budget policies and disregard for adequate regulation.
Correspondingly, the Trump administration’s proposals for unfunded tax cuts and increased infrastructure spending – which would almost certainly increase the budget deficit and raise the public debt when the US economy is close to full employment – ought to raise concerns. The same is true of Trump’s partiality towards financial market deregulation. The measures being promoted by the White House risk retrograding US banking sector supervision to its pre-Lehman crisis position.
The factor that still distinguishes the US economy is its overwhelming size. Its world-leading scale means what happens in the US continues to be of far greater consequence for the global economy than what might be happening in smaller dysfunctional economies. For this and many other reasons, the whole world would benefit if the US could start to curb the seemingly inexorable slippage in governance standards.
Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the Chief Emerging Market Economic Strategist at Salomon Smith Barney.