The reprecussions of economic wars

Mahmoud Mohieldin
Tuesday 28 May 2024

The world is being thrown into chaos by growing economic warfare, radically sacrificing development and growth opportunities for the developing nations, writes Mahmoud Mohieldin

 

The world is suffering because of the economic wars, as opposed to just “trade wars,” between the traditional and emergent powers.

Global trade is slumping, supply chains are being obstructed by tariffs and other restrictions, and the multilateral international order has become so enfeebled that the World Trade Organisation (WTO) is unable to perform the functions for which it was established.

The WTO dispute mechanisms have been effectively out of commission since 2018, while its ministerial meetings in recent years have failed to meet even modest expectations with few exceptions. No progress has been made in key areas of reform, whether in trade rules, notification systems, developing new markets, or getting the dispute resolution to function.

Let us recall that the countries of the Global South would not have been able to achieve the inroads they have made in development, the fight against poverty, and raising income levels since the 1990s had it not been for the expansion of global trade. This is what has facilitated their exports to international markets and imports of production components, promoted competition mechanisms that have boosted the quality of goods and services, and attracted investments complete with funding for emerging enterprises, the acquisition of knowledge and expertise, and the development of advanced production.

If the benefits of international free trade, which are currently being thrown out of the window, have already served the world’s largest economies, they are also indispensable for countries with smaller markets and weaker economies that are unable to generate jobs or raise the income levels of their societies with the constraints of their domestic resources.

These countries have no alternative but to increase exports and attract investment in order to drive growth. Import-substitution measures can only work to remedy trade and payment imbalances in sectors in which countries thinking of applying such measures have comparative advantage and competitive edge.

For decades, many developing nations have pursued populist policies that have boasted of being able to produce anything and everything domestically and “from the needle to the rocket,” as one slogan put it. The result has been reckless initiatives launched without proper feasibility studies that have eventually yielded only declines in economic performance, higher trade deficits, and large amounts of international debt.

Meanwhile, other successful developing and emerging markets economies have forged forward by pursuing industrial policies in the framework of a strategy for integrated development in which financing has been more carefully calibrated and deployed. This has enabled them to achieve steady cumulative growth of at least seven per cent on average and equipped them to lift themselves out of extreme poverty and progress to the foremost ranks of the global economy.

Unfortunately, the opportunities to achieve this today are rapidly dwindling in a world that has been thrown into chaos by economic warfare. The battles have expanded beyond trade to include foreign direct investment, which is now also being obstructed by new hurdles and barriers.

At the same time, the realm of technological cooperation is also shrinking due to laws that explicitly prohibit working with others in certain fields so as to fend off competition in these areas. The so-called new industrial policies recently adopted in the developed countries have ushered in a raft of restrictive measures that not only hamper trade and investment, but also hamper capacity development, training, technical cooperation, and employment prospects.

The justifications cited for such policies and measures vary and range from preserving the ability to “stay ahead” to fighting climate change and from strengthening commercial supply chains to national security considerations and geopolitical challenges. Among the sectors most hit by economic warfare are the high-tech industries, semiconductors and microchips, heavy industry, pharmaceuticals, and low-carbon products.  

As the economic wars intensify, action is required at four levels to stem the escalation of already serious crises, the deterioration of trust, and the further fragmentation of the global economy.

The first starts by realising that the development of a country’s economy begins at home. It is the product of an interplay between institutions, policies, and markets. If the performance of a country’s institutions declines because they lack the basics of sound management, if public policies are disorganised and uncoordinated, if means are confused with ends and there is no clarity in priorities, if the efficacy of market forces is hampered by warping the rules of fair competition, and if the private sector’s role is subordinated to that of government with no clear lines being drawn between the two, how will it be possible to achieve the desired development?

The second involves remaining committed to and building on the existing bilateral relations that bring countries and their economic partners closer together. Such relations should not be taken as given. They should be subjected to review in terms of the relations between their component parts and of how the private sector can contribute to strengthening them.  

The third level of action is at the regional level. Over the past month, Riyadh, Kuwait, Cairo, and Nairobi have hosted regional economic and financial gatherings, starting with the Islamic Development Bank’s 50th anniversary celebration in Riyadh, which was attended by representatives of 57 nations.

This was followed by the meetings in Kuwait of the members of the Coordination Group for Arab Development Institutions and the Development Assistance Committee of the Organisation for Economic Cooperation and Development. Cairo then hosted a meeting of the Arab financial institutions, after which came the 60th annual meeting of the African Development Bank in Nairobi.

Such gatherings open promising opportunities for cooperation and growth in their members’ geographical vicinity.

Finally, there must be more action to localise sustainable development. Priority should be given to investing locally in towns and villages nationwide in the development of human capital, infrastructure, technological development, sustainability, and the green economy.

 

This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 29 May, 2024 edition of Al-Ahram Weekly

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