By Daniel Brodén

The year 2008 proved a humbling year for economists as the global financial crisis hit. Widely held beliefs in economic theory were shattered almost overnight. By the same standard, for the political class eight years later, the events of 2016 could be described as a global political crisis, with the two defining moments being the referendum in the United Kingdom, known as ‘Brexit’, and the election of a celebrity property mogul as President of the United States.

These two events, combined with the recent rise of populism seen elsewhere in the Western world, seemed unthinkable not that long ago. The force of globalization was supposed to make the world flat, erase the meaning of national borders and inevitably turn all the countries of the world into market-friendly liberal democracies.

That national borders would be made irrelevant was not a narrative shared by all, however. Dani Rodrik, an economist at Harvard University, has been a long-time sceptic about the benefits of unbridled globalization. In 1997 Rodrik released a book titled Has Globalization Gone Too Far? Going completely against the grain of received wisdom at the time, Rodrik argued that increased international economic integration was exposing a fault line between people that had the skills to succeed in global markets and low-skilled workers that were not conditioned to flourish in the new economy. Hence, the big challenge that governments faced going forward was to make sure that the economic forces of globalization would not lead to domestic social disintegration and political instability.

The preoccupation of heads of states and policymakers at the time however, was not so much the focus on how to mitigate the negative impacts that globalization might have, but rather it was to enact reforms that would increase their nation’s international competitiveness. This recipe to beat out the competition included deregulation, privatization and the removal of barriers for trade and capital. These reforms called the ‘Washington consensus’ were widely adopted and implemented by parties both on the left and right of the political spectrum.

Although this economic model had previously been discredited by the experiences that cumulated with debt crises, first in Latin America in the 80s and then in Southeast Asia in the 90s, it proved remarkably resilient. For the Western countries it was not until the global financial crisis struck in 2008 that the realities of its limitations started to hit home.

The discontent first became visible in the US, where the Tea Party movement quickly gained prominence on the right. The political centre held firm in Europe in the immediate aftermath of the crisis, but with a slow recovery, sovereign debt crises, and most recently, an influx of refugees, fringe parties on both the left and right started to erode support for the traditional mainstream parties. What these populist movements have in common is a rejection of multilateral institutions and increased global economic integration in the face of globalisation, the nation-state is reasserting itself.

This backlash should not have surprised anybody, writes Rodrik in a paper released this summer. Each nation has its own collection of social contracts that relates to how the market economy is organized. What we are talking about here are rules regarding labour standards, financial regulation, health and safety, environmental regulation, taxes and so on. These social contracts in turn form the foundation for what type of market transactions we see as just or unjust.

The way globalization works is that, through trade and the mobility of capital, it puts countries in direct competition with each other. One example of how this plays out, is that developing countries with low wages and weak labour standards are able to export goods and services to industrial countries with high wages and strict labour standards, thereby undercutting certain industrial sectors of the economy in the developed countries.

People who lose their jobs because of this are naturally aggravated; in their eyes they have been made unemployed by unfair competition. And while the process of globalization is not the only force that has contributed to increased inequality and economic anxiety (automation and technological change are arguably more important) international trade does have redistributive consequences. This notion of perceived unfairness is what causes dissatisfaction and makes people receptive to populist ideas.

What this means for us is not that we should raise barriers and become protectionist, as many of the populist parties are suggesting. Rather, we have to realize that there is no single way to prosperity along the lines of the Washington consensus. What we need is an international system that gives countries more leeway in how they can pursue economic policies that are consistent with the makeup of their respective social contracts.

According to Rodrik, this rise of populism forces a necessary reality check. The challenge that policymakers and traditional political parties face today is to rebalance globalization in a way that maintains an open world economy whilst curbing its side effects.

 

Daniel Brodén is a Master’s student specializing in financial management. He enjoys reading newspapers and books,  thinks the Colbert Report is the best comedy show ever created, and wishes someone would give him a ticket to Springsteen on Broadway. 

 

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