Worrisome Trumponomics
As the President-elect Donald Trump takes office, economists world over are worried at how might Trump’s policies affect economic growth and human development the world over. The first point of worry is Trump himself. Such a statement would be ironical in usual times but these are unusual times with a very unusual President (to-be) of the United States of America. And Trump is a worry because as umpteen number of analysts have pointed out, he is unpredictable and that does not bode well for the economy. We do not know if his anti-trade policies will actually come to pass or whether a Republican Congress and Senate will be able hold true to the Republican values of free trade. The hope is the latter will prevail but if Trump’s recent statements on universal healthcare are an indication, Paul Ryan and Mitch McConnell have their task cut out in pushing their policy agenda.
But if Trump does get to have his say and impose trade barriers, it is unlikely that this will bear fruit for the American economy in the long run. For, to begin with, Trump wants to bring back manufacturing jobs to America — a task which will only get increasingly difficult because of convergence of the manufacturing sector and the fourth industrial revolution. Both these aspects I explain below, but the bottomline is that by imposing trade barriers and forcing American firms to manufacture in the USA, Trump will only compromise on comparative advantages. This is likely to have short term gains in terms of increased domestic employment but will have severe long term effects as and when the profits of the American firms catch up with the trade-off of manufacturing domestically.
Why this is almost a certainty is because of convergence in the manufacturing sector. Convergence, as a theory, was first pushed around by a bunch of economists at the World Bank in the 80s and the 90s. The basic idea was that if developing countries introduced a set of reforms, they will grow at a higher rate than developed countries and eventually catch up with the developed countries. The set of reforms continued to grow and it was not until the list reached a set of 150 reforms that we began to realize that this may not work. But the idea in itself wasn’t bad. Where the theory went wrong was in its assumption that the developing countries could continue to grow like the developed countries had grown. And that assumption didn’t materialize because, ironically enough, we saw the manufacturing sector converge — on the lower end. We may actually be looking at stagnation across the world consumption patterns in manufacturing and that is why looking at manufacturing as the source of an economic revival for the US is flawed thinking.
Finally, there is a recent realization that we have been witnessing a fourth industrial revolution — the kind of cyber-physical space. This has been in progress since the tech revolution but has come as a shock and caught us unawares because of its exponential growth as opposed to a linear growth witnessed during the other three revolutions. While pages could be written about the fourth industrial revolution and its myriad specific challenges, the biggest realization (and a challenge) is that human capital is set to replace physical capital as the most critical factor of production. Simply speaking, the focus of the next administration has to be on developing new age skills because as the physical, digital, and biological worlds continue to converge on newer technological platforms, the administrations that adapt to disruptive changes are more likely to bring prosperity to their citizens. Trump’s focus on manufacturing is anything but an attempt to adapt. It is clinging to an era gone by, a longing for a world that no longer exists. And that should have more than just the economists worried!
