These 5 Facts Explain Why Economic Reforms Are Stalling Globally

The lack of meaningful structural reforms is a significant worry for the world in 2017—Eurasia Group, the political risk consultancy I founded, even included “No Reforms” as a Top Risk for the year. Here, then, are five facts that tell the story of political and economic paralysis around the world:

1. Some countries have come a long way already

If you’re going to be included in this roundup, this is the category you want to be in. In India, Prime Minister Narendra Modi has been on a torrid reform pace, instituting a long-awaited goods and services tax, reforming bankruptcy policy, and liberalizing foreign direct investment in multiple sectors. He even undertook the rather drastic—but necessary—measure of yanking 86 percent of India’s currency from circulation in an attempt to crackdown on tax evasion and corruption (only 1 percent of Indians paid income tax, after all). He’ll now turn his attention to winning impending state elections to shore up his support base. That’s the right move.

Mexico is another story. President Enrique Peña Nieto has spent his single six-year presidential term passing energy, telecoms, education and tax reforms, all of which have made Mexico a much more attractive destination for foreign investment. Unfortunately for Peña Nieto, he hasn’t done nearly as well in addressing Mexico’s soaring crime rates and corruption scandals—and then there was the whole Trump debacle. Peña Nieto has run out of political capital, so don’t expect much reform movement in Mexico as he prepares to wrap up his presidency in 2018.

(Vox, BBC)

2. Other countries have too much else going on

Sometimes, much needed reforms are victims of the electoral calendar. In France, President François Hollande moved political mountains to reform the country’s labor laws. The move was incredibly unpopular, and combined with the country’s ongoing terrorism woes, plunged his popularity to 4 percent; he wisely demurred from running for reelection. The country is now in a holding pattern until May, when a second round of presidential elections will be held. In Moscow, Vladimir Putin will hold off on difficult spending cuts and tax hikes (hello again, low oil prices) until after Russia’s spring 2018 elections. Not that he has anything particular to worry about given his 84 percent approval rating, but no need to tempt fate.

For the world at large, the biggest “no reform” concerns emanate from China. In the fall of 2017, Beijing will swap out five of the seven members of its Standing Politburo Committee, a leadership transition that will further slow Beijing’s attempt to shift its economy from exports to consumption, a knock which will be felt by the global economy. The good news though is once the transition is over, the new members will likely breathe new life into the country’s sustained reform push.

(The Economist, Levada Center)

3. A few countries are trying — but failing

Then we have countries which need to reform themselves and are willing to do so, but will fall far short of what’s actually needed. Leading this category is Saudi Arabia, which like Venezuela (see below) is being forced to contemplate life after high-price oil. The Kingdom’s deputy crown prince, 31-year old Mohammed bin Salman, announced last year a highly ambitious reform agenda called Vision 2030, intended to wean the country off its oil dependency in little more than a decade. While certainly the right idea—oil currently accounts for 42 percent of the country’s GDP and 90 percent of its exports—generations of Saudis have grown accustomed to state handouts; that’s not something that can be untaught in the span of a decade. For reforms to really take hold, they often need an accompanying shift in culture and expectations. The Saudis aren’t there yet.

(Forbes)

4. Then there are the countries that aren’t even trying

Plenty of countries are too steeped in political turmoil of their own making (by and large) to even think about undertaking necessary reforms. It wasn’t that long ago that Turkey was being widely praised as an emerging market darling. From 2002 to 2007, the country was averaging 6.8 percent annual GDP growth, thanks in part to market-friendly policies. But now Turkish President Recep Tayyip Erdogan is hell-bent on cementing his power with constitutional changes that will require the public’s approval—so don’t expect any more financially necessary-but-unpopular reforms to come to Turkey anytime soon. In Italy, a failed reform effort by Prime Minister Matteo Renzi led to his ouster and the 64th government in 70 years; fixing Italy’s ailing banking system will yet again take a back seat to its chaotic politics. And in the U.K., Brexit will wholly consume Prime Minister Theresa May’s attention, to the detriment of pressing domestic issues.

(The Economist, The New York Times)

5. Finally, the countries that are too far gone

Let’s end with the most obvious candidates. North Korea isn’t going to experience fundamental reform anytime soon—the survival of the Kim regime is predicated on Chinese largesse and keeping itself cut off from the rest of the world. That explains why international sanctions against Kim Jong Un have done little to derail his nuclear ambitions; giving the regime the very isolation it needs to survive can be counter-productive like that. But the world has no real other options at its disposal.

Venezuela, somehow, is in an even more desperate situation. The country was riding high during the Hugo Chavez era, buoyed by a charismatic leader and the largest proven oil reserves in the world at a time of high prices. But then the energy revolution came around, dragging down oil prices and an ill-prepared Venezuelan economy with it. Now the country is facing a series of food and electricity shortages, while Chavez-protégé Nicolas Maduro is hanging on by the skin of his teeth. Real reforms require political courage and resiliency, both of which Maduro lacks as he fights for his political survival. But as this list shows, he’s not the only one.

(EIA)