This article first appeared in Forum, The Edge Malaysia Weekly on August 24, 2020 - August 30, 2020

Major crises often shake up existing policy frameworks and usher in fundamentally new ones. As the world endures the worst pandemic in modern history, massive failures in public policy and political leadership have been exposed in many countries, undermining the current order and making a big break with past policy approaches more likely.
In the US, Democratic presidential candidate Joseph Biden is leading the opinion polls. This matters because he has committed himself to the most progressive Democratic election manifesto since 1972, and there is a growing feeling that a ground-breaking change is in the offing in the US. And where the US goes, quite often others will follow.

What shake-up in policies should we expect around the world and where will that leave Southeast Asia?

The current pandemic has certainly shone an unforgiving light on policy failures. But these failures are not new and many have been accumulating over the past two decades. What is new is that these debacles in policy have reached a critical point where political convulsions are possible if people do not see progress. To see why this is the case, just look at the litany of failures, the many areas in which ordinary people feel let down.

First, large swathes of the population in developed as well as developing nations feel frustrated and neglected. The pool of people “just about managing” has grown hugely. In many countries, median incomes have stagnated in recent years while there is a growing sense of insecurity about jobs, incomes, healthcare and retirement needs.

This is most shockingly the case in the US, where, for decades, the average household has seen very little improvement in its standard of living despite the impressive expansion of the economy during that period. The sharp rise in housing costs and those of higher education has left many, especially the young, feeling that the economy is passing them by. In both the US and Europe, there is a large number of underfunded pension systems, which means many retirees may never receive the pension payments they were promised.

Clearly, the fruits of growth in the economy have been usurped by a narrow minority in the population, leaving a considerable proportion of the citizenry feeling left out. Inequality has deepened and there is a sense that social mobility has slowed.

Second, the succession of crises in the past 15 years has undermined confidence in the political class and its policy mandarins. They are seen as having failed to anticipate and prevent the financial shocks that have caused so much damage. Or, as in the case of the less predictable pandemic, of badly fumbling the management of the crisis. The global financial crisis and the eurozone sovereign debt crisis caused much pain to the average citizen, who was left embittered by the way banks and other large corporations were bailed out but the average citizen was not.

Third, there is dissatisfaction with the way globalisation and other forms of integration with the world economy have panned out. In theory, international trade and migration produce net benefits for everyone. In practice, however, there are winners and losers. It is only when the state intervenes to compensate the losers through measures to create new engines of growth, extend assistance with reskilling and job searches, and provide adequate social safety nets that most citizens feel that they are winners. Somehow, in the past 20 to 30 years, that simple lesson was lost, hence the backlash against globalisation and free trade as well as the growing hostility against immigrants.

Fourth, there is growing consternation, especially among the young, over climate change. There are more and more reports of extreme weather patterns, such as droughts and floods, causing havoc. The long-term impact of climate change — rising sea levels, higher temperatures and more extreme fluctuations in weather — is becoming more palpable. Yet, there has been no global consensus on mitigation policies. Indeed, some large countries such as the US and even Australia are run by political leaders who espouse bizarre ideas about climate change.

These are big failures and there are too many of them. Voters around the world are fed up and want change. The question is what kind of change could actually emerge?

Once the pandemic is over, we are likely to see transformational change in several areas. The first is more radical measures to reverse the trends in inequality through tax reforms to bring about more redistribution of wealth and incomes.

That means higher taxes on the incomes of the well-off and a rise in corporate taxes. High-net-worth individuals and companies should also expect fewer tax benefits such as exemptions on mortgage interest payments. It is possible that new forms of inheritance taxes will be employed as well, since there is a deepening sense that concentrations of wealth have grown as a result of the abolition of estate duties.

Second, governments will need to alleviate growing social anxiety and address demands for improved social mobility through higher social spending.

Third, an overhaul of regulation and supervision is needed to address the politically unacceptable clout of large companies, improve the ability to prevent crises and empower consumers.

Fourth, governments are likely to return to some forms of industrial policy for several reasons:

Fifth, an expanded provision of public goods is needed. In the US and in poorer countries, there has been woeful provision of physical infrastructure such as mass transit, roads and airports.

So, to conclude — should investors fear leftward policies and, if so, where?

Almost certainly, there will be a fundamental reorientation of policies. In the 1980s, the rightward shift in policies instigated by British prime minister Margaret Thatcher and US president Ronald Reagan greatly influenced the rest of the world. Much of that will be reversed. So, investors will have to accept that higher taxes and greater regulation could constrain profitability to some extent.

Such changes will, however, improve political stability and sustainability in the long term. Moreover, the policy shifts will probably be implemented in a pragmatic fashion over time and companies should have the ability to adjust to the new environment. After all, companies still prospered and enjoyed reasonably good returns in the 1950s and 1960s when taxes and regulations were rigorously enforced.

China and India also seem to be reconfiguring their policy approaches. The former is adapting to a more hostile America by putting greater emphasis on developing home-grown technology and building domestic engines of growth. As a series of important statements coming out of Beijing in recent weeks shows, this does not mean China is turning inwards. It will remain open to foreign investors and engage more with the outside world. It may even open up its capital markets further to the outside world. However, the economy is likely to be driven much more by the state than in the past.

India’s emphasis on self-reliance seems real. While not a throwback to the 1950s, when it cut itself off from the world economy, it does look like the country will be less interested in trade integration with other parts of the world.

Where does this leave Southeast Asia? There are two implications for this part of the world.

First, the region is not immune to the growing tide of political feeling described above. As the current protests in Thailand show and as the recent general election in Singapore hinted at, regional governments also need to reorient policies if they want to stay ahead of the curve.

Second, as the US and other developed countries such as China and India change policy gears, this region will have to adapt. If all these countries ramp up social protections for their citizens, it will be harder for regional governments to deny their citizens similar reforms. Separately, the region may gain from production relocation as factories move out of China. But it may have to compete harder with India and even developed countries, which will lean on their companies to bring some production home.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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