Monday, July 11, 2016

Solutions to contain backlash to Globalisation needed

The United Kingdom’s narrow vote to leave the European Union had specific British causes. And yet, it is also the proverbial canary in the coalmine, signalling a broad populist/nationalist backlash — at least in advanced economies — against globalisation, free trade, offshoring, labour migration, market-oriented policies, supranational authorities and even technological change.

All these trends reduce wages and employment for low-skilled workers in labour-scarce and capital-rich advanced economies, and raise them in labour-abundant emerging economies. Consumers in advanced economies benefit from the reduction in prices of traded goods; but low- and even some medium-skilled workers lose income as their equilibrium wages fall and their jobs are threatened.

In the Brexit vote, the fault lines were clear: Rich versus poor, gainers versus losers from trade/globalisation, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. The same fault lines are appearing in other advanced economies, including the United States and continental Europe.

With their more flexible economies and labour markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. Job creation has been robust, with the unemployment rate falling below 5 per cent, even if real wages are not growing much.

Donald Trump has based his campaign on "Making America Great Again" by getting jobs back in USA
Yet in the US, Mr Donald Trump has become the hero of angry workers threatened by trade, migration and technological change. In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services.

In continental Europe and the eurozone, however, economic conditions are much worse. The average unemployment rate hovers above 10 per cent (and much higher in the eurozone periphery — more than 20 per cent in Greece and Spain) with youth unemployment over 30 per cent. In most of these countries, job creation is anaemic, real wages are falling and dual labour markets mean that formal-sector, unionised workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits.

Politically, the strains of globalisation are twofold. First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalisation, are being challenged by populist, nativist/nationalist anti-establishment parties. Second, establishment parties are being disrupted — if not destroyed — from within, as champions of anti-globalisation emerge and challenge the mainstream orthodoxy.

Establishment parties were once controlled by globalisation’s beneficiaries: Capital owners; skilled, educated and digitally savvy workers; urban and cosmopolitan elites; and unionised white- and blue-collar employees. But they also included workers — both blue- and white-collar — who were among the losers from globalisation, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because centre-left parties were formally supporters of unions, workers’ rights and entitlement programmes.

After the 2008 financial crisis, globalisation’s losers started to organise and find anti-establishment champions on both the left and the right. On the left, the losers in the UK and the US, especially young people, found champions in traditional centre-left parties: Mr Jeremy Corbyn in the UK’s Labour Party and Mr Bernie Sanders in America’s Democratic Party.

The deepest fault lines emerged among centre-right parties. These parties — the Republicans in the US, the Tories in the UK and centre-right parties across continental Europe — confronted an internal revolt against their own leaders. The rise of Mr Trump — anti-trade, anti-migration, anti-Muslim and nativist — is a reflection of an uncomfortable fact for the Republican establishment: The party’s median voter is closer to those who have lost from globalisation. A similar revolt took place in the UK’s Conservative Party, with globalisation’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party.

In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden and elsewhere.

But, despite the growing number, organisation and mobilisation of globalisation’s losers, globalisation itself is not necessarily doomed. For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalisation are a large — if at times silent — majority. In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalisation and technological innovation.

This is also why populist and anti-establishment parties are still a political minority. Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity and painful structural reforms, moderate, pro-European forces remain a majority.

Even in the US, Mr Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. Whether he can win the presidential election in November is highly doubtful.

This is also why pro-European centre-right and centre-left coalitions remain in power in most of the EU. The risk that anti-EU parties may come to power in Italy, France and the Netherlands — among others — is rising, but still remains a distant possibility.

Finally, economic theory suggests that globalisation can be made to benefit all as long as the winners compensate the losers. This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits and portable pensions).

For workers to accept more labour mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems.

The backlash against globalisation is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs. Only by enacting such policies will globalisation’s losers begin to think that they may eventually join the ranks of its winners.