Commentary from Project Syndicate
Can the open global economy be saved from populist challengers – and from itself? Justin Yifu Lin, Ngaire Woods, Robert Shiller, and other Project Syndicate commentators examine why globalization is in such distress and disrepute.
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Beyond the rancor and taunts heard at last month’s Republican National Convention, something even more ominous could be heard: the last rites for globalization. To adoring hoots, Donald Trump, the party’s presidential nominee, denounced US participation in international trade deals, and the foreign policy he sketched would pull the plug on the entire US-led liberal international order within which globalization has flourished. Should Trump enter the White House, globalization would not undergo a retreat; it would suffer a rout.
Half a world away, G20 finance ministers met almost simultaneously in Chengdu, China, where they made revitalizing globalization a priority for 2016/2017. The fact that all of the major advanced and emerging economies fear for the future of global openness suggests the degree to which surging support for populist challengers has imperiled existing rules and structures.
For many Project Syndicate commentators, globalization seems trapped in a pincer movement: assailed from one direction by those who claim that it has created a reserve army of economic losers lorded over by a small cadre of winners, the infamous 1%; and besieged from the opposite direction by unscrupulous politicians who, feeding on economic resentment, attack it in the once discredited language of nationalism, of blood and soil, of herrenvolk.
More Pain than Gain
For most middle-class people in most developed economies, the last four decades of economic globalization pale in comparison with les trente glorieuses, the 30 post-war years of ever-rising living standards. According to University of California, Berkeley’s Laura Tyson and Lenny Mendonca of the Presidio Institute, the root cause of disappointment with globalization is clear: “From 2005 to 2014, the real income of two-thirds of households in 25 developed economies was flat or fell. Only after very aggressive government intervention in taxes and transfers have some countries been able to hold families at least even.”
Nobel laureate Joseph Stiglitz paints an even grimmer picture. “Median income for full-time male workers” in the US, he points out, “is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.” And it’s not just incomes that are moving in the wrong direction. “The effects of the economic pain and dislocation,” Stiglitz continues, “are even showing up in health statistics” – specifically, declining life expectancy among some non-Hispanic whites. For the United Nations’ Jomo Kwame Sundaram and Vladimir Popov of the Russian Academy of Sciences, the unvarnished truth is that “developed countries should not expect further gains from the process of globalization.”
Income stagnation in many developed countries is a direct result of what Yale’s Stephen Roach calls “the globalization disconnect.” While “seemingly elegant in theory,” Roach says, “the lesson of Brexit and of the rise of Donald Trump” is that “globalization suffers in practice. In fact, the theory of globalization itself hasn’t advanced much since the early 1800s.”
The Anatomy of Anti-Globalization
For former Costa Rican trade minister Anabel González, globalization’s political vulnerability stems from the difficulty of implementing “policies which will ensure that all people – in developed and developing countries – reap the benefits.” But Andrés Velasco, Chile’s former finance minister, asks a fundamental question: given that US wages have been stagnating since the 1970s and unemployment in Europe was persistently high for long periods in the 1980s and 1990s, why is globalization coming under assault now?
The reason, he argues, “has everything to do with politics”:
Elites in Western countries discredited themselves by permitting the financial excesses that helped trigger the Great Recession and by being slow – particularly in Europe – to deal with the social consequences. Next they underestimated the effect that unfettered migration and the perceived weakening of the nation-state would have on the sense of “us” – the people with whom we share a destiny and of whom we ask sacrifices (one of which is paying taxes).
Former Greek finance minister Yanis Varoufakis agrees. “What we are experiencing,” he says, “is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation.” In “drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda,” the populist right has formed “a nationalist international – a classic creature of a deflationary period – united by contempt for liberal democracy and the ability to mobilize those who would crush it.”
Harvard’s Ricardo Hausmann adds a crucial dimension, arguing that populist forces – whether in the US, Venezuela, or Europe – succeed only when they anchor their programs in an alternative mental universe. Citing the example of the seventeenth-century Salem witch trials, he notes that, “Whether policies sound crazy or sensible depends on the conceptual paradigm, or belief system, that we use to interpret the nature of the world we inhabit.” Thus, just as “Venezuela’s chavismo blamed inflation and recession on devious business behavior,” Trump’s supporters inhabit a mental universe where “the US is led by weaklings who are being exploited by savvy foreign powers, masquerading as allies. Free trade is a Mexican invention to take away American jobs. Global warming is a hoax invented by China to destroy American industry.”
It is also a mental universe in which globalization is equated with terror. “If people feel that their leaders are failing to protect them,” the French geo-strategist Dominique Moisi argues, “they may turn to more radical alternatives” and “may even decide to take the law into their own hands.” The specter of vigilantism underscores a fundamental point made by Ngaire Woods, dean of Oxford’s Blavatnik School of Government, about rising support for populist parties and candidates. “The message to the establishment is clear: we don’t trust you anymore” – not to secure our economic wellbeing; not even to protect us.
And, as Jean Pisani-Ferry, Commissioner-General of France Stratégie, would add, “We don’t trust your experts, either.” Indeed, suspicion of those with specialized knowledge is not limited to economic policy. Pisani-Ferry reports a remarkable finding by the French sociologist Gerald Bronner: “education neither increases trust in science nor diminishes the attraction of beliefs or theories that scientists regard as utter nonsense.” This, Pisani-Ferry argues, is obviously “a cause for deep concern,” and not only because dysfunctional beliefs can lead to economic disaster: “Representative democracy is based not only on universal suffrage, but also on reason.”
The Price of Mud
Irrationality and fear mongering are not cost-free. Nobel laureate economist Robert Shiller suggests that some of the “stories circulating today – related to growing nationalism or fear of challenges by immigrants to traditional cultural values – might underpin greater hesitation” to invest. Whether that could “bring on another worldwide recession” remains uncertain; but the very possibility of such an outcome implies that “we should not shrink from considering how such fears are affecting economic decision-making.”
Consider Britain and Europe in the aftermath of the fear-induced Brexit vote – the populists’ lone triumph so far. Although the immediate impact has been less severe than anticipated, NYU’s Nouriel Roubini sees “plenty of reason to worry about Europe and the eurozone.” Perhaps most important, an “ugly divorce” could roil markets and “lead Scotland and Northern Ireland to leave the UK,” fueling secession movements elsewhere. And the other non-eurozone EU members, Denmark and Sweden, could “fear that they will become second-class members of the EU, thus leading them to consider leaving as well.”
Britain’s choice about what sort of Brexit to pursue will also have a profound impact. “A ‘hard’ Brexit,” says Princeton’s Harold James, “would entail the severing of all existing links between the UK and the EU: no more contributions to the common budget and an end to free labor mobility.” By contrast, “a ‘soft’ Brexit would reflect the view that the UK is still a part of Europe, and that Britain still has much to gain from close EU ties.” The latter course, in James’s view, “is the UK’s better option,” reflecting “the triumph of a realistic worldview over a self-defeating perspective underpinned by an implausible notion of sovereignty.”
The presence of leading Brexiteers in Prime Minister Theresa May’s new cabinet would seem to make the “better option” unlikely. But Anatole Kaletsky of Gavekal Dragonomics goes even further. Instead “of rushing Brexit,” he argues, “Europe’s leaders should be trying to avert it, by persuading British voters to change their minds.”
With opinion polls showing overwhelming public support for a “soft” approach, and with the new government holding only a “slender parliamentary majority” that “depends on disgruntled ‘Remain’ rivals,” Kaletsky thinks “the EU could advance this strategy by calling May’s bluff on ‘Brexit means Brexit.’” That means “telling her that only two outcomes are possible: either Britain loses all single-market access and interacts with Europe solely under World Trade Organization rules, or it remains an EU member, after negotiating reforms that could persuade voters to reconsider Brexit in a general election or a second referendum.”
Some Call It Treason
Populists like Trump and Boris Johnson, a leader of the UK’s “Leave” campaign and now the British foreign secretary, portray themselves as national saviors. But, given the high costs that populists can impose on countries – even threatening their survival, as in the UK, or plunging them into a humanitarian crisis, as in Venezuela – are such leaders actually “traitors”? French philosopher Bernard-Henri Lévy isn’t afraid to say so. If Trump were to win in November, “[t]he problem would not only be his vulgarity, sexism, racism, and defiant ignorance. It would be his possible infidelity to America itself.”
To be sure, Trump’s infidelity may not technically constitute “treason,” which the US Constitution explicitly delimits. But Lévy is surely right that Trump is a leader “who betrays not only his country’s ideals, but also its fundamental national interest.”
The primary source of concern is what the New School’s Nina Khrushcheva calls Trump’s “international bromance” with Russian President Vladimir Putin. Trump, she points out, “has complimented Putin’s leadership frequently,” and has said “he would consider accepting Russia’s annexation of Crimea and lifting the sanctions that were imposed in response – all without asking for anything in return from Putin.” Even more shocking, “Trump has called into question America’s automatic defense of NATO allies such as the ex-Soviet Baltic states, whose independence Putin has questioned.”
Like Khrushcheva, Christopher Smart, US President Barack Obama’s former special assistant for international economics, believes that Putin has no serious interest in a Trump presidency. “It may be fun to watch the US body politic squirm, and to gloat as America’s allies wring their hands, but a President Trump would make Putin’s life far more difficult.” Long-term growth “requires a global economy that is stable and predictable. A Trump presidency would mean the opposite.”
When belief systems based on lies make inroads into countries’ politics, is there a way back? Peter Sutherland, a former EU commissioner and the UN’s Special Envoy for Migration, believes that it “is now up to rational political leaders and mass media to reintroduce facts” into debates hijacked by populists, in particular debates about migration. The Brexit vote, he says “was driven by a distorted picture – eagerly painted by tabloid newspapers and populist politicians – of a country overflowing with migrants.” And the UK is hardly alone: “In Eastern European countries, Muslim migrants are perceived as being up to 70 times more numerous than they are.”
But it is not only the populists who have misled the public. Hans-Werner Sinn of Munich University and the IFO Institute thinks that free labor mobility in the EU does indeed pose a threat, which is precisely why Brexiteers were able to capitalize on it. Unless changed, Sinn argues, the current “rules of access to national welfare systems will erode the EU’s welfare states.” This can be prevented only “by restricting either freedom of movement or the inclusion principle.” If Europe’s populists are to be defeated, “the EU must acknowledge the trade-off between the welfare state’s quality, freedom of movement, and inclusion, and it must decide which can be sacrificed.”
Likewise, Stiglitz argues that much of the blame for today’s populist revolt should be laid at the feet of globalization’s boosters. Rather than acknowledging the widespread pain and dislocation reflected in income and health data, many “neoliberal economists who advocated for these policies” have remained in denial, claiming “that people are better off. They just don’t know it. Their discontent is a matter for psychiatrists, not economists.”
That dismissive response, together with “governments’ offers of generous bailouts for the banks that had brought on the 2008 financial crisis, while leaving ordinary citizens largely to fend for themselves,” Stiglitz continues, convinced many people that their pain “was not merely a matter of economic misjudgments.”
China to the Rescue?
Where does the incipient anti-globalization agenda in the advanced countries leave developing and emerging economies? Nobel laureate Michael Spence suggests that, “developing countries, particularly those in the earlier stages of economic development, must find new external markets for their goods, by maximizing trade opportunities with their counterparts in the developing world, many of which have considerable purchasing power.” Although “such demand will surely not offset the drop in advanced-country demand completely,” he says, “it can help to soften the blow.”
If so, what Roach calls “the increasingly virulent China-bashing now sweeping the world” won’t help. As Claremont McKenna College’s Minxin Pei argues, “Regardless of how Brexit or the US election plays out, it is very likely that governments in Western democracies will respond to voter angst and take measures that imply a return to some degree of protectionism.” At a time when China, the world’s second largest economy, is attempting to manage a complicated structural transition to consumption-led growth, any threat to its economic performance would harm developing countries’ prospects.
And Peking University’s Justin Yifu Lin shows that China’s importance to developing countries reflects not only the size of its market, but also its role as a source of much-needed foreign direct investment. As Lin points out, “in 2013 China became the third largest source of other countries’ FDI and is expected to become a net capital exporter for the first time in 2016.”
So far, say Andrew Sheng and Xiao Geng of Hong Kong University, “China’s supply-side rebalancing is moving in the right direction.” But a new direction means new challenges: “unless China’s leaders also tackle the challenges posed by market and bureaucratic inefficiencies, the objective of strong and sustainable growth will remain out of reach.”
Joseph Jimenez, the CEO of Novartis, is optimistic. He thinks that China is on the verge of becoming an innovation powerhouse: “In science and engineering alone, China generates nearly 30,000 PhDs annually,” he points out, while McKinsey estimates that expenditure on innovation will “reach $1 trillion by 2020.” In particular, Jimenez believes that, “China has a real opportunity to become a major force in global pharmaceuticals research, and that there will soon come a time when breakthrough innovation occurs in China on a regular basis.”
Korea University’s Lee Jong-Wha is less sanguine. “To avert a crisis,” he says, “China’s leaders must act now to address the weaknesses in the corporate and financial sectors and to improve macroeconomic- and financial-policy frameworks.” And if they are to ensure that living standards continue to rise – a political imperative for China’s ruling Communist Party – “they must continue to implement structural reforms that support labor-market flexibility and the development of human capital, while privatizing SOEs and liberalizing the financial sector.”
For London School of Economics’s Keyu Jin, the biggest threat to China’s prosperity and stability lies elsewhere. As a result of decentralization, “subnational governments accounted for an average of 71% of total public expenditure in 2000-2014 – a far larger share than in the world’s largest federal countries.” And while decentralization has spurred growth, “three decades of lax governance” have enabled corruption to flourish. Defending President Xi Jinping’s anti-corruption drive, she argues that “[e]mbezzlement and misappropriation of astronomical sums of public funds would have been impossible without accomplices who helped one another ascend the political ladder.” And now, Xi, whose crackdown has led to the detention of officials throughout China in the last two years, has “stopped turning a blind eye.”
The Open Economy and Its Enemies
If only in that respect, democratic leaders should take a lesson from Xi. After all, turning a blind eye to populists’ lies – and, equally important, to the grievances that make those lies seem credible – will only make the problem worse.
But so will doubling down on the status quo. For the last generation, Stiglitz argues, the problem “was not globalization, but how the process was being managed.” Redeeming the promise of an open global economy demands bold initiatives to ameliorate the plight of those left behind. “The Scandinavians,” Stiglitz points out, “figured this out long ago.” As Bo Lidegaard, a former editor-in-chief of Politiken argues, the Scandinavians have succeeded where others have failed because they have been “successful in expanding the scope of work, and of the labor market, to make jobs available to segments of the population that otherwise would have lacked access to well-paid employment.”
As Woods notes, however, innovative policy must be accompanied by credible leadership. “Voters need to see candidates who show purpose, impartiality, and competence. If they don’t, they will continue to vote against the establishment that they believe has failed them – even if it means voting for turmoil in Europe or a reckless narcissist in the US.”
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