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Does Brexit Mean That Globalization Is Dying? Should It?

11/07/2016 12:29 PM IST | Updated 15/07/2016 8:27 AM IST
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When a person living in Pata, a small town in Uttar Pradesh, buys a Canon camera from Amazon and posts a picture of a flower on Facebook, we do not think of globalization -- because globalization is the way of life, even in a small town like Pata. Over the last few decades, the world has steadily globalized -- there has been a multitudinous increase in cross-country trade, capital flow across borders has increased multifold and voluntary movement of people across countries has grown steadily. The word globalization itself has become a commonly used word, although it was rarely mentioned in books before 1980s (as discovered while searching through Google Books).

With the United Kingdom voting to exit the EU, possibly the most ambitious project of globalization, questions have been raised about this de facto state of the world. Apart from the Brexit vote, Donald Trump's nomination as a Republican candidate and the possibility of him becoming the US President, and the rise of many nationalist parties across countries in Western Europe, all seem to question the virtues of a globalized world.

So, has globalization not been good for the world? Why this backlash against it? Economists generally agree that increased trade, capital flow and movement of skill are good, increasing the overall welfare of the population. To be sure, the world has seen unprecedented growth during this era. The aggregate real income has increased pretty much across countries. Yet, it is also known to economists that this gain is not uniform -- there are some who gain more than others, some even lose. Indeed this has been the case through this episode of globalization. A manifestation of this is the increased inequality, particularly in recent years, almost across the globe.

When some people do not benefit from the growth [due to globalization], they are dissatisfied and feel disenfranchised in the current setup.

Identifying The Disenfranchised

This is a matter for concern and also a cause of this current backlash. When some people do not benefit from the growth, they are dissatisfied and feel disenfranchised in the current setup. It is not hard to imagine these people revolting against the current disposition – such as through a Brexit vote. Who are these people likely to be? These are people whose skills are easily substituted, either by capital moving to countries or areas where such skills are plentiful and cheaper, or by people immigrating to areas where such skills are in demand. In general, these are the people with less education. It is relatively easy to find large numbers of people who can type in data or serve food in restaurants, but much more difficult to find a replacement for someone who designs solar panels and batteries or someone who optimizes the use of aircrafts for an airline. Thus, people with low education and skills are more likely to be disenchanted with the current system -- this is something that manifests in the Brexit vote, where districts with a higher number of college graduates tended to vote to remain within EU.

The era of globalization also reveals another trend. While inequality within countries has increased, inequality across countries has decreased. What it means is that countries that were poorer, like China and India, have grown at a rate faster than those that were richer to begin with, such as the UK and USA. Income levels in the poorer countries have come closer (though they are still quite apart) to those in the richer countries. For the middle class (particularly blue collared workers) in the US and some Western European countries, the increase in real wages has not been significant, if at all positive. In the UK, for example, between 2008 and 2013, the median real wage fell significantly. During the same period the real wage has increased in most emerging economies. In Poland, for example, it has increased by over 10% during the same period. This can create a sense of loss and resentment. More so for people who have memories of a time when their relative purchasing power -- relative to both the rich in their country and the middle class in emerging economies -- was higher. Could this also be a cause of this push against globalization? It is possible.

The era of globalization also reveals another trend. While inequality within countries has increased, inequality across countries has decreased.

It is also very easy for politicians of different stripes to use, and exacerbate, this resentment -- as has been witnessed in the campaigns for Brexit in UK and by Donald Trump in USA where references to India, China and other emerging economies were made frequently. Not surprising, therefore, that people over the age of 50 voted for Brexit in much larger numbers than the younger group. It is probably worth noting here that the older generation saw the process (and the impact) of globalization and carried memories of a different world, unlike the newer generations who were born into this era.

The Future For Emerging Economies

What does the future hold for the world economy, and particularly for emerging economies like India? In the short run, the dominant factor will be the uncertainty of the process. It will take at least two years for UK to disentangle itself from the EU, but there are already questions bubbling about other European countries. Will we see the EU unraveling? What will happen in the US presidential elections? These worries will have an immediate impact on many economic activities, particularly cross-border transactions. India may see some impact in the near future due to lower foreign investment levels and trade volumes not increasing (or falling).

However, what matters most is what happens in the longer run. What kind of world order will emerge? Are we headed to a more fragmented world? If isolationism increases, it will clearly have an impact on the world growth rates. Even if there is no increase in protectionism, greater fragmentation will hike the cost of trade and doing business. This cost can be disproportionately more for less developed countries, particularly because of shortage of specific types of skilled people required in this new world order. For example, just getting enough well trained staff to negotiate trade and investment deals with a larger number of countries might be difficult for governments. Similarly for businesses, negotiating with an increasing number of varied norms and rules will be challenging and costly.

We will have to find a way to ensure that gains from globalization are more evenly spread through better healthcare and education systems, and the creation of more opportunities ...

It is not yet certain, though, that we are entering into such a world. To ensure that we don't, the roles of governments and policy makers are important. The most important policy challenge, in any country, is to find a way to deal with the rising inequality. We will have to find a way to ensure that gains from globalization are more evenly spread through better healthcare and education systems, and the creation of more opportunities for those adversely affected by the process of globalization. In India, it is doubly important for us to invest in education, skilling and healthcare. This will not only help us decrease inequality, but will also be the essential ingredients to keep growing at a high rate, no matter what new world emerges.

The greatest hope that the future of the world is better than what Brexit makes it to be at this moment is the fact that the younger population in UK has overwhelmingly rejected the idea of an isolationist and segregated UK, voting instead to stay in the EU. It does seem that they value the opportunities globalization creates at an individual level and beyond. We should not forget that the last few decades of globalization have increased aggregate income across the world and decreased inequality across nations, and in the process pulled millions out of poverty. The world is better off because of that.

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