Perhaps the Sky isn’t Falling

A rational evaluation of the state of the global economy is needed to counter the effect of the doom and gloom merchants causing jitters in markets.

By Khalid W. Wazani

Although in economic theory, prices are the main determinant of quantity demanded or supplied, other factors such as expectations are the ones that move the whole demand or supply mechanism upward or downward. The theory of rational expectations has become one of the main pillars in economic literature since the early 1980s. However, the backbone of that theory is the full information system that makes expectations reasonable as far as full information is available to make any decision rational and applicable.

The problem with today’s world of expectations is that policy makers are more into making their decisions on a certain occurrence or a single price expectation, like in the case of oil price fluctuations. The only bundles of information used today for expectations are either political or personal. The problem with those expectations is that they set the tone for the markets. Thanks to negative or shortsighted expectations, worldwide markets are suffering from risk averse investors who are choosing to keep their cash in safe havens rather than risking any new investment. Both the IMF and the World Bank have largely subscribed to this outlook. Their overly conservative expectations and bureaucratic analysis of the economic situation over the last decade have given a big push to the sluggish movement of the world economic outlook. The IMF outlook for 2016 and 2017, for example, sees growth in global economy as remaining flat. The World Bank is even more pessimistic. Expectations have become a negative and contagious disease, leaving the world markets with skeptical investors and delusional bankers.

I don’t mean to say here that positive expectations are solely sufficient to revitalize the stagnant economic outlook, but rather that negative expectations are contributing a lot to the current deadlock in the world economy. Politicians have found it much easier to hang their failure to create jobs and a proper investment environment on economic expectations rather than admit their short-sightedness and weak policies.

What’s needed today is for the global economic body to go back to the original foundation of the rational expectations theory and try to come out with more realistic forecasts for the global economy. Those expectations depend more on the great opportunities the world can potentially acquire, rather than stick to the negativity of the desk-based bureaucratic negative expectations the international institutions are offering today.

Finally, when it comes to Jordan the government found it much easier to hang poor economic performance over the last three years not only on worldwide negative economic expectations but also on regional political unrest. That was a relief for the government not to initiate anything except new taxes and less supply side policies that could move the economy forward.