Leadership is Important: Macroeconomics Impact Series-Part 2

Hello everyone! I hope you guys have gone through the first part of this Macroeconomics Impact Series. If not you can follow this link to have a look at it. I hope that you guys enjoyed reading the last article where I talked about the importance of having a growing and skilled workforce population which is very critical for the stable and expansive growth of any economy.

So this time for the second part of the Macroeconomics Impact Series I will be talking about the need for dynamic leadership in a country’s governance. The top leaders are a crucial piece of the jigsaw puzzle of a country’s economy. A strong and disciplined leader can bring a lot of change by taking and executing long-term decisions that might be hurtful in the beginning but have a bigger picture in mind. Whereas a leader who is easily swayed by the popular demands might end up becoming a demagogue and make decisions which provide temporary relief but end up trashing the economy.

There are many examples in the global scenario which show how the country’s economy gets swayed by the decision-making skills of its leaders.

For example, when Putin came to power in Russia in 2000, Russia was suffering from double-digit inflation, bottoming GDP, falling population growth and rampant corruption. In his first two terms, Putin as the president brought in a wave of reforms which transformed Russia. He doubled the country’s GDP, brought down inflation, reduced fiscal deficits and promoted privatization of state-run industries.
But even he fell corrupt to the power of leadership. His good run made him complacent and he soon started taking decisions which are currently proving disastrous for the nation. He started consolidating power and took decisions like providing huge subsidies to the people and changing the constitution. The fall in commodity prices made things worse for the nation because its growth was heavily dependent on the sharp increase oil prices of the 21st century. Currently, Russia is facing an ever-rising inflation, devaluation of its currency ruble and rising inequality.

Even in India, the first term of the Manmohan Singh government had brought in a disciplined set of reforms which had raised the GDP growth of the country to around 9%. But by the second term, the government became complacent and that term was marred by scams, rising inflation, and declining GDP.

This can be described as a circle of life which is one of the basic rules of macroeconomics, what goes up infallibly comes down. As a general rule when a country has its back to the wall and is faced with many core issues, there is usually a change in power which often brings much-needed reforms. But as the economy starts growing, leaders tend to become complacent and start holding on to power. This is bad for the economy as the leadership starts making populist moves without seeing its future effects.

On one hand, a country does not need a technical leader who cannot understand the local sentiments. Because this individual will not have the charisma to push a nation for tough reforms. This is seen in the case with Greece after the 2011 crisis. After the painful crisis, the people turned to their central bank chief Lucas Papademos to lead the nation as the prime minister. But after failing to bring in changes he soon left the office in a year.
Technocrats make good advisors but never good leaders in governance posts.

On the other hand, a leader who is a fervent nationalist and believes in populist moves is not the need of the hour either. A great example lies in the case of Venezuela. In 2002 when Hugo Chavez a radical populist took power in Venezuela, he was initially heralded as the people’s champion. He soon brought in socialism into the state which scared away the business elites and after that, the nation’s economy has never recovered. It has piled up huge foreign debts and is facing a dangerous recession.The state is facing with inflation rates of over 250%. Under him and his successor Nicolas Maduro, the once vibrant democratic nation of Venezuela is currently on the brink of a dictatorship.

Any economy that hopes to become an economic powerhouse needs populist leaders who either have a very good understanding of economics or are surrounded by people who do. A populist leader has the credibility and charisma to push the nation’s people to painful reform changes for the better of the nation.
A great example was the Philippine President Benigno Aquino who came to power in 2010. He used the popular public support as fuel to build one of the fastest growing economies of Asia. He invested heavily in productive infrastructure projects and made it easier for new businesses to open which has had a positive impact on the nation.
India’s prime minister Narendra Modi is of a similar caliber, a populist leader who can take the tough decisions. The full effect of his reforms are quite debatable but he has brought a new wave of change that is aimed at improving India‘s present situation.

When we are talking about governance, China can never be left out of the equation. China has stood out as a startling example of how an authoritarian state can work for the better of its people and achieve enormous growth. In fact, China’s success story puts into question the kind of governance a country should have. Is an authoritative government really the solution?
China is an anomaly in this case because it has followed an aggressive economic reform system aimed at becoming the top economic superpower in the world. It has enjoyed three decades of rapid economic growth at an average of almost double-digit GDP growth. It is only in the recent decade that it seems to be faltering and is facing a major slowdown in its economy.
Not only China, but also leaders like Lee Kuan Yew of Singapore, Park Chung-hee of South Korea, and Chiang Kai-shek of Taiwan have raised economic marvels.

But for every success story similar to China’s authoritative government there are many examples where such a government has ended up in a dictatorship and destroyed the economy of the country.
Mugabe’s 37-year rule as the president of Zimbabwe serves as a reminder of how an authoritative government can steer the wrong way. When he came to power in 1980, he started with some much needed educational and health reforms which helped the nation. But by 1990’s the condition started deteriorating and slowly he became desperate to hold onto power. He used every trick in the book including violent intimidation, press censorship, mercenary killings and abuse of power to make sure that he remained in power. It was not until recently that a military coup removed him from his seat of power but not until he had put Zimbabwe’s economy into a downward spiral.

Fidel Castro in Cuba, Kim Jong-un of North Korea, Kurmanbek Bakiyev of Kyrgyzstan, Rafael Correa of Ecuador and Muammar Gaddafi of Libya, all of these leaders are some of the failed authoritarian states that just lost their way. It is not about the kind of government structure you have in a country but it matters whether its leaders are capable for the job or not. And more often than not most of the leaders end up getting corrupted by the power or take devastating steps to gather public support.

That is why a very sure way of gauging a country’s economic potential is by seeing the political record of its leaders. By understanding that, it is easier to measure whether a country has the ability to emerge as an economic giant or not.