As I write these words, there are only a few hours left before US President-elect Donald Trump is inaugurated for a second term in office – his last, according to the US constitution – and as the leader of the world’s largest economic, military, and technological power.
8At the same time, the new Trump administration is expected to take steps to increase its fiscal flexibility by lowering taxes for businesses and increasing spending to stimulate the domestic economy. It will also lift restrictions on such activities as oil and natural gas production and trade in cryptocurrencies, including Bitcoin.
Such measures are expected to constitute the hallmarks of Trump’s economic approach or “Trumponomics.” They reflect Trump’s own perspective and outlook, but what matters will be their implementation and their impact.
Massive deporting of illegal immigrants from the US will disrupt its labour market and increase production costs. Tariffs are both a tax on consumers with possible inflationary impact, and subsidy to producers, many of such of producers may not enjoy competitive advantage to benefit from such subsidies. So their net benefits could be negative on the economy. On top of their inflationary effects, tariffs also court reciprocal measures. Increases in spending will increase the budget deficit, debt, and inflation. Moreover, deregulation without proper safeguards is the path to market instability.
Trump’s second term begins as the first quarter of the 21st century draws to a close and at a time when global economic growth rates range between 2.7 according to the World Bank, and 3.3 per cent, as per the International Monetary Fund (IMF). These rates are likely to persist at these levels for the current and coming year, according to the two international financial institutions.
The world has just gone through a period that saw inflation rates unseen in 40 years. Only recently have they begun to decline to 4.2 per cent. But this entailed strenuous efforts and high costs, the worst being the impacts of interest rate hikes, which drove up financing burdens, investment costs, and debt.
Moreover, despite the decline in inflation rates, essential to improve living standards, not all requirements for the desired improvements have been met – income levels still lag behind the accumulated increases in the prices of basic goods and services.
Developing countries entered this century with the hope of narrowing the vast gap between them and the developed countries. They achieved commendable progress during the early years of the century, collectively succeeding in producing half global GDP, according to the recently published World Bank’s Global Economic Prospects report.
However, after the financial crisis of 2008 struck, growth rates declined from about six per cent in the first decade of this century to around five per cent in the 2010s and then to 3.5 per cent today. With this continuous decline in the growth of the average income of the developing countries compared to that of the developed countries, how will the former ever be able to catch up?
How will the developing countries manage to stay the course of progress, when they are so encumbered by debt that, given their limited resources, the amount they need to cover their debt-servicing payments leaves them unable to cover the costs of essential public services, such as education and healthcare?
Many developing economies are strongly affected by external factors because of their excessive reliance on imports, decline in export growth, and excessive external borrowing. They are therefore more vulnerable to the repercussions of geopolitical conflicts and consequent global economic fragmentation and polarisation.
As a result, the steady growth that the developing economies experienced for a few years has now reversed course, defeating aspirations for economic convergence between the Global South and North as once again the disparity gap between the two worlds widens.
The US today leads the developed world in economic growth. The IMF expects it to rise to 2.7 per cent while in the EU it is not likely to exceed one per cent. This suggests that the US will remain ahead with a widening gap with the EU economy, which is undergoing deindustrialisation due to declining competitiveness, for example EU energy costs of natural gas are five times higher than in the US.
It should therefore come as no surprise that consumer confidence in Europe is plummeting and that the latest report on European economic competitiveness, known as the Draghi Report, warns of existential risks to the EU if it does not direct sufficient resources to stimulating growth, specifically through investment in research and development, technological innovation, sustainability, energy security and defence.
Given the current precariousness of the global economy, Trump’s management style is as important as his economic policies. Based on the record of his first term in office and the signs so far of his second, his approach will largely be characterised by deal-making, opportunism, sudden shifts in position based on short-term calculations, and attempts to manoeuver with political constraints.
The incoming administration, judging by Trump’s nominees for its highest offices, will feature three interrelated camps: the populist “America First” movement, the mega tech firm leaders with their boundless ambitions for expansion, and a coterie of veteran career officials familiar with the machinery of government.
However, the overriding factor remains President Trump himself, who is endowed with the constitutional powers of the presidency, and his own unconventional and mercurial management style.
This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
* A version of this article appears in print in the 23 January, 2025 edition of Al-Ahram Weekly
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