Tuesday, 11 April 2017

What Next For Globalization?

2016 political and electoral shocks in the UK and US, and the rise of ‘populism’ in western civilization have raised the question of whether current models of societal structure remain valid.  Elections in the Netherlands, France and Germany in 2017 will all play significant roles in shaping not only the future of the EU, but also in determining if Globalization as we know it will continue.

A quarter of a decade ago the “Silent Revolution” of Globalization was in full swing.  The collapse of the Soviet Union and increased co-operation between the IMF and many developing countries led to a change in the way the world was doing business.  Economic relations were strengthened, international alliances were formed and the path to success seemed certain.  So how have things gone so badly wrong so quickly?

Successful economic globalization requires reasonably successful growth patterns in individual countries. The routes of modern globalization were formed in the 30 years or so after World War II, when growth rates across a multitude of countries were extremely high.  Benefits of this growth were being broadly shared within countries, and the rise of developing economies helped reduce global inequality enormously.
Globalization continued beyond the 1970s, but slowly the underlying growth patterns changed.  Labor arbitrage embedded in economic globalization and increased use of digital technologies meant advanced economies’ middle-class manufacturing jobs disappeared.  Median incomes stagnated, and job and income polarization grew, even though many country GDP’s growth remained strong.  This new pattern – persisting through the 90’s, accelerating post 2000 – caused inequality to rise sharply.  Ultimately, this is what weakened the foundations of globalization and has led to the problems we are seeing today.
Countries’ responses to this changing dynamic have varied widely.  Some have taken steps to reduce inequality via redistribution of wealth through tax and social security systems.  Others have examined education systems, or introduced reform and provided support for effective job training and development, so future earnings potential has been increased. The potency of such efforts tends to be shaped by cultural norms, the institutional bargaining power of labor, the level of trust between labor and business, and the influence of individual and corporate wealth on politics.
But in countries with weaker mitigating forces – particularly the US and the UK – disparities of income, wealth, and opportunity became the most extreme. The lack of any substantial policy response in recent years, together with the apparent lack of concern from those whose economic bargaining power had increased, has incited deep anger and resentment among those most affected.  Many western countries and even some developing countries are facing weak or non-inclusive growth and persistently high unemployment. In Europe’s case, these problems are rooted in a system with few escape valves and adjustment mechanisms.
It is this persistent non-inclusive growth that lately has been transforming economies. In such situations, the circuit breaker is political, and often dramatic. Outside of developed democracies, persistent lapses in inclusiveness are nearly always devastating for long-term growth and development, and often lead to violence and civil strife such as seen in Venezuela over the last two years.
In functioning democracies, political drama for the most part has been confined to elections and referenda – such as the Brexit referendum and the US presidential election.  Disaffected voters who have never been exposed to rioting or civil unrest are using elections to reject the systems that produced the deficiencies they are faced with, and unless we see a tectonic shift in global government policy, we should probably expect to see more similar occurrences in the next few years in Europe.
While it may be too late to persuade voters not to reject the existing systems, there is still time to build effective alternatives. The upside to the tremendous uncertainty that people in the UK are facing, is that they essentially are confronted with a clean slate. Without outside interference from the EU, and with previous barriers and restrictions being erased - it may be possible to create something better.  Post Brexit growth patterns and policies could take many directions, including the rejection of multilateralism, in favor of bilateralism or protectionism.  Immigration was has been a central subject in US, UK and European elections, and has a key role to play in the development and growth of any country.  But the coming years may well see subtle policy shifts to offer greater employment and income protection to country nationals.   Expanded public investment and fiscal stimulus; regulatory changes; tax reform; or supply-side measures in education, training, and health care are all additional areas that could experience substantial change.  

Of course there are risks and potential benefits in all of these areas, and results will depend greatly on how policies are formed and implemented.  While the potential outcomes remain bewildering at this stage, one thing is clear.  The political unrest that has reared its head in western civilization is surely just a preview of what may come if governments do not become more inward looking.  Globalization is by no means dead, but in its current format cannot continue, and must adapt to survive.

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