Populism & Realism rule

VIDEO TRANSCRIPT

The South Korea president shocked the world this week by imposing martial law and then lifting it a few hours later.

The French prime minister just handed in his resignation after a vote of no confidence by the opposition parties

Demonstrators are clashing with the police in Georgia following the election victory by the pro-Russia party.

2024 has been called the biggest ever election year

How do we make sense of the results of elections in 70 countries?

Which countries have emerged stronger following their elections and which ones weaker?

Which are best positioned economically and geopolitically in 2025?

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Democracy is a necessary evil

Winston Churchill called democracy "the worst form of Government except for all those other forms that have been tried from time to time.…"

The Cold War ended with the triumph of democracy

Except the triumph did not last very long

The global average of the EIU’s Democracy Index, which surveys 167 countries, has been declining since 2016 (Chart 1)

At the end of 2023, it was at the lowest level since the index began nearly 20 years ago

2024 has been called the largest election year in history

More than 70 countries, accounting for half of the world’s population, held national elections in 2024

As 2024 draws to a close, did these elections strengthen or weaken global democracy?

 And what are the implications for the global economy in 2025?

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Despite democratic backsliding over the past decade, democracies are still more resilient than authoritarian regimes.

According to the Institute for Democracy and Electoral Assistance, out of all democratic countries that existed in 1975, 92.1% remain democratic today.

Only three no longer qualify as democratic: Turkey, Thailand, and Venezuela

Democracies are more resilient because elections provide an opportunity for policy reset.

The means democracies, at least in theory, are more capable of change, especially when things are not going well.

Is it true in practice?

Let’s look at the 9 G20 democracies that held elections this year.

US, UK, France, Japan, South Korea, India, Indonesia, Mexico and South Africa

Are they stronger after their elections?

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We can divide these 9 countries into 3 groups.

Group 1: Those that were already doing well before their elections and the elections provided a mandate for policy continuity

Group 2: Those that were not doing well before their elections but the elections provided a strong mandate for change

Group 3: Those that were not doing well before their elections but the elections provided no mandate for change

In the first group, we have Indonesia and Mexico.

Under President Jokowi’s 10-year rule, Indonesia’s GDP growth has averaged more than 4% while inflation has stayed low.   

As a result, real GDP per capita increased at an average annual rate of 3% under his watch (Chart 2)

Jokowi also ran a tight fiscal ship

Indonesia was only one of two G20 countries that ran a primary fiscal surplus last year (Chart 3)

In February, Prabowo Subianto, Jokowi’s former defense minister, won by a landslide, promising continuity.

If it ain’t broke, don’t fix it.

Indonesia is well positioned economically and geopolitically in 2025.

Economically because its prudent fiscal policy will help it cope with potential global interest rate volatility better than others

Geopolitically because its deeply ingrained non-aligned orientation will allow it to become a balancing force that it wants to be

The story in Mexico is similar.

President AMLO was able to fulfill his promise to reduce poverty and the income gap between the rich and the poor. (Chart 4)  

Importantly, he did this without blowing up the budget.

Mexico’s debt to GDP ratio is only slightly higher after his 6 years in office. (Chart 5)

In June, Claudia Sheinbaum, a protégé of AMLO, also won by a landslide, vowing continuity.

Like Indonesia, Mexico is also well positioned economically and geopolitically in 2025.

Geopolitically because Donald Trump will need Mexico’s cooperation to solve the illegal immigration problem.

Economically because the Trump needs USMCA and the cheap labor that Mexico brings to the table to compete with Chinese manufacturing.

I like both the Indonesian rupia and the Mexican peso.

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Now the second group:

Countries that were not doing well before their elections but the elections provided a mandate for change.

In this group, we have the UK, US, and South Africa.

For very different reasons, all these three economies were struggling before their elections

Under the last Tory government, the UK has seen an unprecedented decline in standard of living (Chart 5)

This is why the Labor Party won by a landslide in July, winning the most seats of any British government since 1997. (Chart 6)

Even though it got only 33.7% of the popular votes, Labor’s comfortable majority means time is on its side.

It won’t be easy to turn around the moribund economy, but Labor seems to have its priorities straight

Prime Minister Keir Starmer promises this week to achieve the highest sustained growth in the G7, the top of his list of six milestones.

Whether this is a realistic goal or not, Labor appears to understand that an increase in economic growth is the only way it will be able to make good on their other promises and that it won’t happen by itself.

I am cautiously optimistic.

The bar is low and Starmer, unlike his conservative predecessors, seems to not mind getting his hands dirty.

Equally importantly, Starmer is a realist.

He has improved Britain’s negotiating position in Europe in a short time and his speech at the Lord Mayor's Banquet early this week suggests he understands the second Trump term offers a huge opportunity for Britain.

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Like the UK election, the 2024 US election was also decided by the economy. 

Under President Joe Biden, real medium US household income stagnated (Chart 7) even though federal government budget deficit was never higher outside a recession

As a result, President Donald Trump won both the electoral college and the popular votes and the Republicans swept both houses of congress. 

Trump has been given a powerful mandate. 

Coupled with his ambitious pro-market policy agenda, it is difficult not be bullish about the US economy going into 2025. 

But as I have said elsewhere, the surging interest payments on US debt means if Trump wants to extend his 2017 tax cuts he will have to cut spending. (Chart 9)

But even with the help of Elon Musk, he will struggle to find $500 billion worth of cuts in federal discretionary spending without touching defense spending

This means stopping the war in Ukraine is not just a foreign policy goal for Trump’s but central to his economic plan. 

In this respect, I see potential pushback or rearguard actions by the military-industrial complex as the biggest risk to Trump 2.0

The fact that there are reports that he is consider replacing Pete Hegseth with Ron DeSantis as defense secretary suggests he might think the same

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Let’s now turn to the third group:

Countries that were not doing well before their elections but the elections provided no mandate for change.

In this group are France, South Korea, and Japan

The ruling parties in all three countries lost their parliamentary majority in their respective elections.

Voters’ frustration with rising costs of living was a decisive factor in all three elections.

In October, Japan’s Liberal Democratic Party lost its parliamentary majority in the powerful lower house for the first time in 15 years.

In July, President Emmanuel Macron’s centrist coalition received only 25% of the popular votes and finished in second place, barely ahead of the far right.

In April, President Yoon Suk-yeol’s conservative People Power party failed again to win a majority in the National Assembly.

All three countries now find themselves in a state of semi political paralysis that might be here to stay.

Macron’s presidency does not end until 2027 and he has refused to resign.

Likewise, the next presidential election in South Korea is not until 2027.

As I record this video, Korea’s opposition parties are trying to impeach Yoon which requires support of two-thirds of the National Assembly for the motion to succeed. It is not clear whether Yoon’s party which has the votes will decide to block his impeachment.

In Japan, Prime Minister Shigeru Ishiba is running a minority government that needs support from the opposition to pass any bills and the budget.

Of the outlook for these countries, I am more constructive about Japan and pessimistic about France.

In many ways, Ishiba is the perfect guy to run a minority government.

It took him five tries before winning the LDP leadership because he is a maverick who has a history of crossing party lines.

Inside his own party and he is known as a traitor for sometimes siding with the opposition in his criticism of the LDP.

He is also a realist in foreign policy.

He wants to promote mutually beneficial ties with China and for Japan to share command and control over U.S. troops on Japanese soil.

There is no miracle but my bet is that Japan will be stronger economically and geopolitically under his watch

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What South Korea and France have in common is that political polarization has become so extreme and personal that there is little room for cooperation between parties.

However, the important difference between the two is that South Korea has only two main political blocks, progressive and conservative, whereas France has three blocks, far right, centrists, and far left.

This means that while South Korea can easily resolve its current political paralysis by a successful impeachment of Yoon, in France, even if Macron were to agree to step down tomorrow as president, no clear political mandate would likely emerge.

France is in a democratic purgatory and with no way out.

And it has only itself to blame.

Its ruling elite took the masses for granted for too long and pursued policies that did not represent the political will of the people.

As a result, the political fringe got stronger despite demonization by the elite.

France is in the biggest political crisis of the Fifth Republic.

The economy will continue to suffer.

But I think a major economic crisis may be what’s needed for France to change course.

Meanwhile, what’s going on in France is a harbinger of what’s to come in Germany.

The same political fragmentation is happening in Germany

This means that in the upcoming federal election in January the Christian Democrats, which are currently leading in the polls, will not likely be able to form a government on their own.

The AfD, currently in second place in the polls, should be a natural coalition partner for the CDU given they overlap on some key issues like immigration.

 But given the demonization of the AfD by the mainstream parties, there is little chance of that happening.

This means the most likely outcome will be another grand coalition between the CDU, SPD and the FDP.

Germany’s experience with grand coalition over the past three years teaches us that it only gives way to indecision and pet policies of the coalition partners.

Germany has no time to waste and yet it looks like that’s exactly what it is going to do.

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My predictions:

Political polarization is weakening many democracies

Countries have either embraced populism or kept it at arm’s length

Populist governments in Mexico and Indonesia have delivered

And Trump’s victory suggests that Americans are willing to give populism another chance

Given its history, Europe’s instinct is to suppress populism. 

For whatever it worth, I think this is a big mistake.