As 2024 begins, it is worth doing a quick retrospective on some of the major economic and financial decision-making of 2023.  Every day, governments make hundreds of economic decisions that affect all our lives.  Sometimes policymakers get them right: economic pain is averted, growth is preserved, and millions are able to lead stabler lives.  Sometimes policymakers get them wrong: millions see their standards of living drop, hard-earned wealth is destroyed, and health and educational outcomes suffer.

Let’s review some of the best and worst calls of the past year.  The categories we will review are:

• Monetary policy, which involves the management of liquidity in the economy and the setting of interest and exchange rates (where applicable), and is usually conducted by a country’s central bank;
• Fiscal policy, which involves managing the state’s budget (income and expenditures), as well as the financing of the state’s debt, and is usually conducted by a government’s finance ministry;
• Banking supervision, which endeavors to keep the banking system trouble free and the country’s various payment systems cheap and efficient, and is sometimes conducted by a country’s central bank but elsewhere by a stand-alone agency; and
• Trade policy, which regulates the flow of goods in and out of the country, often via bilateral and multilateral agreements with major trading partners, and which is usually spearheaded by a government’s trade/commerce ministry, with some input from the foreign ministry as well.

*** Monetary Policy ***

Best Monetary Policy: The U.S. Federal Reserve, which is on track to pull off the nearly impossible “soft landing” of lowering inflation without triggering a recession.  (On the whole, the US economy did quite well in 2023, in case you were wondering, compared both to the past, as well as to peer countries.)

Worst Monetary Policy: The Central Bank of the Republic of Türkiye, which spent most of the first half of the year keeping interest rates perplexingly low even as annual inflation stayed between 40% and 60%, only to do an about-face beginning in May and raise interest rates 30 percentage points in six months (by way of comparison, the U.S. Federal Reserve raised interest rates by only 27 basis points—0.27 percentage points—over that same period).  Predictably, the high levels of inflation have impoverished millions of ordinary Turks.

*** Fiscal Policy ***

Best Fiscal Policy: The newly elected administration of Nigerian President Bola Tinubu, which ended Nigeria’s very expensive fuel subsidies.  Look, we all know it, removing fuel subsidies is usually political suicide—reforming or even attempting to reform fuel subsidies has caused protests, strikes, and government downfalls in dozens of countries, as people take to the streets to preserve cheaper fuel prices. But the Tinubu administration bit the bullet on Day One, and seems to understand that, over the medium-term, getting rid of the sheer cost and distorting effects of fuel subsidies will pay for itself back in terms of an improved fiscal position, better government investments, and improved growth.

Worst Fiscal Policy: Argentina’s Economics Minister Sergio Massa eliminating his country’s income tax as an election giveaway, despite the government’s perilous fiscal circumstances, … and then still losing the election!

Dishonorable Mention: The U.S. Congress repeatedly playing with fire with a last-minute raising of the country’s antiquated “debt ceiling” in June and a stop-gap budget extension in November.  This clear inability of Congress to use normal budgetary processes amid ever increasing political polarization caused two credit agencies to downgrade their outlook on the U.S.’ sovereign debt.  All the while, Congress is doing nothing to actually tackle the country’s ballooning debt, even as the cost of servicing that debt rises exponentially with interest rates.

*** Banking Supervision ***

Best Banking Supervision: When it comes to banking supervision, if you are doing it right, ideally nothing should happen.  All your country’s banks should just operate smoothly, with no bank runs, bank failures, major loan defaults, or turbulent fluctuations in your banks’ stock prices.  So let’s give the top prize to the Bank of Canada, which saw absolutely nothing happen on its watch in 2023, despite overseeing the world’s seventh-largest financial sector.  Indeed, fun fact, only 2 banks have ever failed in Canada since 1924, which is pretty impressive!

Worst Banking Supervision: Swiss financial regulator Finma, which failed to see the danger signs at Credit Suisse—Switzerland’s then-second-largest bank—in time. When Credit Suisse faced a bank run by its creditors in March, Finma and the Swiss National Bank then jointly forced the bank to be sold to its larger rival UBS for only 1% of its pre-crisis value during one brutal weekend. While it will take years for the full consequences of this acquisition to play out, we already know that 35,000 employees will lose their jobs, Swiss taxpayers are potentially on the hook for $9.8 billion, and bank competition in Switzerland will almost certainly suffer.

Honorable Mention: If the best thing that a bank regulator can have happen is nothing, the second-best things is swiftly cleaning up messes.  So an honorable mention goes to the U.S. Federal Reserve and the Federal Deposit Insurance Corporation, which acted dramatically to contain the fallout of the collapses of Silicon Valley Bank, Signature Bank, and Silvergate Bank in March, while also ensuring that shareholders and other financial institutions bore most of the costs (as opposed to taxpayers).

*** Trade Policies ***

Best Trade Policy: Honestly, none.  2023 revealed that the protectionist trade policies adopted by most major trading powers in the world during the Covid-19 era are not going away any time soon.  Even as individual national leaders change, protectionism is here to stay in the capitals of industrialized countries.  A review of the most significant trade deals signed in 2023 reveals either milquetoast accords or very narrow agreements focusing on specific sectors,[1] a far cry from the ambitious multilateral free trade agreements (FTAs) of yesteryear.  Compounding matters, the World Trade Organization remains on critical life support as U.S. administrations from both parties have prevented it from performing its core function—adjudicating trade disputes between member states.

Worst Trade Policy: The European Union, which saw two major trade negotiations—with, respectively, Australia and Mercosur (a group of five Latin American countries)—collapse in the last two months of 2023.  Arguably, the EU has never been able to make up its mind between signing FTAs in order to secure increased access to foreign markets vs. not signing FTAs in order to protect its domestic industries and agricultural producers.  This strategic unease is exacerbated by the fact that any trade agreement the EU strikes must get approval from the European Commission (in the form of Directorate-General Trade, but sometimes also Directorate-General International Partnerships if the trading partner is a developing country), the European Council, the European Parliament, and then all 27 national parliaments… a painstakingly long and fraught gauntlet for any kind of international agreement, let alone one with potentially painful implications for sensitive domestic constituencies.  Despite being the world’s largest market, the EU is still not capable of global leadership when it comes to trade policy.

*** On the Horizon in 2024 ***

• Will the stern medicine recently ordered by Argentina’s new government (a more than 50% devaluation of the peso, dramatic spending cuts, a lifting of currency controls) lead to positive results?  Will the Argentine government be able to get the tricky sequencing right?
• Several developing countries—including Zambia, Sri Lanka, Ghana, and Ethiopia—are stuck in economic limbo, having declared sovereign defaults due to their inability to pay back their creditors in full. They are now unable to access international financial markets, leaving them incapable of doing routine economic activities.  Most of their creditors are willing to take a haircut on the debt that is owed to them, but one major lender is holding up the debt negotiations—China.  Will this impasse get resolved in 2024?
• The impact of major elections in dozens of countries, both in the developed and developing worlds.  We know that electoral periods cause increased political violence and tempt governments to engage in short-sighted economic policy making.  Will policymakers around the world be able to navigate all this uncertainty deftly?

Let’s end on a positive note, however.  On the whole, economic policymakers (at least those in wealthy, democratic societies) are getting better and better at their craft.  Here’s a chart that makes that case for the United States:

Months shown in purple are periods when the economy was shrinking; months shown in blue are periods when the economy was expanding.  Moving with time towards the right, blue areas increase and purple areas dwindle, signaling that policymakers were better at steering the economy.  This is not to say that we have solved all macro-economic problems (while the data is not in yet, it seems like that inequality both across and within countries grew in 2023), but we can all be thankful that recessions are increasingly a thing of the past.

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[1] Missing from this review article is the free trade agreement signed between the European Union (EU) and Kenya, but even that was decades overdue and salvaged from the ashes of what was originally supposed to be a trade deal between the EU and five East African Community (EAC) countries, as I may perhaps discuss in a future blog post.