EconoMatters, Future of Globalization, Global HotSpots

Globalization and the West: Coping With the Politics of Anger

What happens when the need for economic adjustment moves from the global South to the North.

Credit: Stephanie Jones - www.flickr.com

Takeaways


  • Rapid change generates a political backlash among those who see themselves as the losers of change.
  • Radicals from both the left and right reject free economic exchanges that underpin the prosperity of advanced countries.
  • There is no magic “reform” of the EU or the eurozone which could thwart the populist threat.

For better or worse, we are living in exciting times. On the one hand, globalization and rapid technological change are creating huge opportunities. On the other hand, the gains are not evenly distributed. The major winners are:

1. The hundreds of million people in formerly closed economies who have been lifted out of extreme poverty over the last two decades on an unprecedented scale.

2. The much smaller, but very influential group of those in the advanced world who are drivers of innovation, have the required skill sets or at least the flexibility to adjust to the new global division of labor.

Conversely, those who see themselves as losers of change are concentrated in the advanced world among those who lack either the opportunity, the skills or flexibility to adjust.

Their plight is often made worse by regulations and by education and welfare systems that hinder, rather than promote, the required flexibility.

Backlash? Nothing new

As usual in history, rapid change and significant immigration generate a political backlash among those who see themselves as the losers of change.

Across much of the Western world, this backlash has been exacerbated by the legacy of the post-Lehman mega-recession.

The crisis itself was caused by a twin policy mistake – inflating a big credit bubble until 2007 and then letting it burst in a way that triggered the worst recession in most developed countries in almost 80 years.

Sadly, the surge in public debt in the wake of this mega-recession by

  • 41% of GDP in the United States
  • 46% in the UK and
  • 26% in the eurozone

from 2007 to 2015 has left hardly any room for governments to compensate the actual or perceived losers of globalization.

The financial crisis and the extraordinary measures needed to contain it have also fed a pervasive “anti-establishment” sentiment.

As a result, disenchanted voters have been drawn to populists from the ultra-right and ultra-left of the political spectrum on both sides of the Atlantic.

Short on arguments but long on rhetoric, the populists have skillfully harnessed stratified social media in which mainstream views are often drowned out in favor of circles whose members re-inforce each other’s views.

The radicals from the left and the right have their differences. But as they rebel against the real or perceived indignities of globalization, they largely agree on one point.

They both reject the open societies and the free economic exchanges that underpin the prosperity of advanced countries and offer the emerging economies the only feasible path to catch up with the free societies of the Western world.

It’s not about Europe

The fact that the rise in right- and left-wing populism is a problem for much of the economically advanced world leads to one major conclusion: Contrary what is often said, the European institutions are not the major problem.

As a consequence, there also is no magic “reform” of the EU or the eurozone which could thwart the populist threat.

In fact, making that argument, as some very prominent national politicians tend to do to show some resolve or sense of action, sets the EU once again up for failure. It is asked to deliver what it cannot bring about.

Of course, some reforms would be useful. Just don’t expect any such reform to suffice to stop the tide of populist anger.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

Responses to “Globalization and the West: Coping With the Politics of Anger”

Archived Comments.

  1. On September 1, 2016 at 3:56 pm Andrew responded with... #

    This is a good article and mirrors many of the thoughts of John Mauldin’s “Life on the Edge” article.

  2. On September 3, 2016 at 1:01 pm zimb abwe responded with... #

    Very interesting to see you focus on DEBT, not a single mention of massive and growing inequality, tax havens and collapse of meaningful democracy. Why?