Populist policies around the world may be winning the hearts and minds of voters, but they are threatening to undermine the drivers of economic prosperity.
As I move around markets, I am currently encountering two sets of nervousness. First there is the conventional nervousness relating to China and the global economy – it's serious, but then we have seen it before. However, there is a second and more subtle fear as societies move towards populist policies.
These kinds of policies have outcomes that mystify investors, who see that Australia, the US and Europe are seeking greater productivity but look to be moving in directions that endanger productivity.
The market’s conventional nervousness has been well documented. Markets fear a severe China slow down and this fear is causing traders to sell down commodities; they fear that higher interest rates both in Australia and globally could lift the cost of money for corporations and consumers; they fear that the debt situations in problem countries like Greece, Spain, Italy, etc, might squeeze the availability of money; and markets fear that the US recovery will be tepid.
Adding to this list of concerns, we have the chartists who see the steep rise that the market has enjoyed and predict that if a fall develops momentum it will be as steep as the rise.
We will be following those conventional fears in the days and weeks ahead. But today I want to focus on the fear about the way societies are moving towards populist policies and are becoming less business friendly.
The other day I was talking with the chief of a major global company who ranks the rise of international populism as the greatest challenge he faces. There is no one event that isolates this trend but rather it is a series of separate political actions around the globe.
Let’s start with Australia because we are among the leaders of the charge. Australia has introduced a set of industrial relations rules that takes us back a quarter of a century and will in time change the balance of power in favour of unions in highly profitable areas like resources.
At the same time, we are planning a resources tax which supposedly will replace the state taxes, but that is not going to happen – it will be a new tax. The banks’ overseas borrowing costs are rising, but we vilify banks who try to pass on those costs to the politically sensitive home mortgage borrowers. We don’t care about business borrowing costs. So, in Australia we are taking action on the two largest segments of the stock market – banks and resources.
In the US they are planning to stop banks from trading assets and are attacking bonuses (see Full Coverage: Obama's financial sector reforms). These moves may be justified but they represent a totally new attitude to business. We are likely to see many more populist measures.
In the UK and Europe there are similar signs. The global financial crisis, ageing populations and perhaps climate change are pushing governments to the left of where they had previously operated.
In each case, when governments act in this way they aim to gain in the popularity stakes. Obama made his move against the US banks after the loss of the Kennedy Senate seat of Massachusetts. The UK faces an election. Wayne Swan (like Peter Costello) knows there is political mileage in attacking banks while few see the long term threat of the new IR laws to employment and productivity.
A couple of decades ago politicians realised that they had to be careful when putting the business community offside to please voters. It is still early days, but the signs are there that the lessons of the past have been forgotten.
Over time the markets can handle the conventional fears and for Australia the main one is China. But world markets will become greatly concerned if they are hit by a double whammy – a realisation of the conventional fears and the rise of anti-business populist policies. And the most popular but devastating action the US could take would be to introduce widespread clamps on Chinese imports.
This article first appeared on Business Spectator
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