External factors affecting the 2018 economy
Gerardo P. Sicat (The Philippine Star) - January 31, 2018 - 12:00am

External developments are often the X-factor that bring surprises to our projections of the economic future.

Using the language of sailors, we can only sail against the prevailing wind which only nature controls. Failing to adjust the sail has the consequence of the boat going off-course, sinking, or getting grounded.

Such external developments could be due to the forces of: (1) nature; (2) geopolitics; and (3) global or social trends. Economists often talk of these as “exogenous” factors.

Natural events and catastrophes. The forces of nature, including climatic changes, are well known to us.

Good weather is always desired and appreciated. But catastrophic natural events could result in disastrous consequences. Looking back to our history, we only need to think of a few examples to make that point.

Recall Typhoon Yolanda (Haiyan) in Tacloban (2016), the Baguio earthquake of 1991, or the eruption of Mount Pinatubo (1991).

No one could have foreseen them even in the year they happened. Such natural phenomena are outside the realm of prediction in economic projections, except to take account of them and their consequences when they happen.

The common means to prepare for the effects of natural disasters is to mitigate them via long-term or more permanent solutions. For instance, we could build stronger structures, whether they are vertical buildings or public infrastructure like roads, ports and water impounding dams. These require higher investment costs.

Regulations on building standards could be raised for higher safety. But in a country with limited capital resour-ces, such defenses cannot be resorted to ever sufficiently and affordably.

Hence, we are in a sense highly exposed however we try. And natural catastrophes happen at intervals that cannot be predicted or planned for perfectly.

Geopolitical events. Geopolitical events, or significant political events that happen in specific regions, can have destabilizing impact and alter the international landscape.

Examples of these are: the nuclear tension in North Korea that affects East Asian security; the South China Sea military constructions of China that has unsettled the regional peace in maritime commerce in the region; the proxy wars among the big powers and regional powers in the Middle East and elsewhere; and the Arab-Israeli problem that has stalled peace in the Palestine region.

Each one of these examples could affect many countries within a region or destabilize global balance of power. One spark that unsettles major relations could lead to cataclysmic results affecting not only one country, but several.

Political events in an important country could have serious influence on what other countries might be forced to do. This has been highly demonstrated by the rise of protectionist and other populist policies affecting trade, immigration, and climate change issues with the rise of Donald Trump to the United States presidency.

In specific terms, the foundations of globalization, more open borders and continued flow of foreign trade and immigration have been strenuously tested by the rise of Trump in the United States. The US withdrew from the TPP (Trans Pacific Partnership) trade agreement which it originally tried to start. Then it heightened trade disputes within NAFTA (North American Free Trade Agreement involving Canada, Mexico and the US). Moreover, the US refused to join the UN-sponsored climate change agreement. And China was put on notice about being tough on trade issues.

Even leaving aside the US, if any unexpected political development were to happen in China or Japan, the potential impact on the Philippine economy would be significant. Such event could affect flows of trade, of capital or in the direction of long term economic relations.

When Brexit was voted by the British electorate in a referendum that had political consequences, the European Union’s long direction toward an expanding economic union came to a shocking halt. Now, the problem is how to arrest a breakup of the larger union or, how to create new modalities of trade relations between the EU and other countries seeking global trade relations with them.

There is reason to believe, however, that 2018 would be less volatile compared to those experienced in the past year.

In 2017, the rhetoric arising from Trump’s assumption to the US presidency resulted in the disruption of expectations about an orderly system of world trade. Such acts like the US abandonment of the TPP, the heightening of tensions within NAFTA, the rough rhetoric covering China-US relations rattled economic expectations worldwide. Moreover, the Brexit-EU event was marked by highly uncertain trade relations gathering storm between the trading parties, bringing economic gloom over Europe.

This year, high volatility arising from the same factors are likely to cool down and lead to a reduction of economic variability that the world faced in the previous year. The US economic recovery, which started during the Obama years, has been further boosted by the passage of Trump’s tax reform package. This gives stimulus to world economic growth, bringing in positive economic expectations in major countries.

The Trump government has somewhat reduced the level of anti-trade rhetoric by trying to show its softer side, as shown by his address to the Davos meeting this week (and also in his State of the Union address before the US Congress which is to be delivered shortly as a I write).

And, despite the nuclear security tension which affects not the entire Asia and Pacific region, a sudden cooling down between North Korea and South Korea appears to highlight an orderly and safe Winter Olympics event in Korea next month. Moreover, the tense South China Sea confrontations have scaled down considerably.

Global and social trends.There are global and social trends and scientific and technological innovations that will shake up our economic future.

There is only space to discuss one development, that on “artificial intelligence” (AI). Future industrial prospects will impact on employment and production trends, given the evident advances.

The country’s BPO industry, a booming dollar-earning industry for us, has to face this future.

In the next year, the impact of AI will not be large. But count within five years or more, and some developments will alter our BPO services industry. Brave and attentive adjustment is needed.

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

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