The integrated world economy has been shaken by repeated crises. The dramas have led to more and more unease about “globalization”, or alternately, as its critics call the process, “neoliberalism,” “turbo-capitalism,” “casino capitalism,” “disordered capitalism,” “capitalism pure” or “Anglo-Saxon economics.”
With every crisis, an initial reaction is that the new events spell the end of a particular model of liberal economics, the so-called Washington consensus. In fact, although some crises can be cathartic and push policymakers to take corrective measures, others can be Carthaginian. In the history of the past two centuries, there has only been one such radically destructive crisis, the Great Depression, and it is not surprising that people are terrified of repeating the experience.
Holger Schmieding, Chief economist at Berenberg Bank in London explained that what are the consequences of the periodic collapses of the global economy? Is the newest and most serious episode a step on the road to a profound backlash against globalization and integration? In 1997-98, the United States government and international financial institutions held up the American system as a model for emulation.
One decade later, the roles seem to be reversed, and it is Asia that now has the right to lecture the Americans, while Europeans are confidently predicting the imminent export of a European social model to the United States. There is a new level of radical uncertainty about institutional design. According to Holger Schmieding, the slogan of the new age, which was much ridiculed at the time, became that associated with Margaret Thatcher: There Is No Alternative (TINA). In most countries, old political divisions between right and left no longer made sense in the light of globalization.
Holger Schmieding argued that at the heart of the left-right divide had been a struggle for redistribution, with the left wanting to redistribute more, and the right wanting less redistribution. In democracies, this often produced a convergence around the center, in that both left and right-wing parties needed to appeal to a median voter. This seemed to rule out either extreme of expropriation or the absence of redistributive taxation.
In the last decades of the 20th century, however, the factors of production became more mobile. Small countries such as Sweden with deep social democratic traditions had to lower their rates of corporate taxation in order to prevent an exodus of firms. Instead of a left-right divide, a new center emerged that welcomed globalization.
In Latin America, leftists with a Marxist background saw international openness as a way of modernizing society. So did the Communist party in some parts of India and so, above all, did the Chinese Communist party. There was thus more convergence and consensus about the idea of the market economy than at any previous time in the 20th century.
Harold James, Harvard University Fellow, stated that instead of concentrating on the battle for redistribution, which had been the political theme of the world after the Great Depression as well as after the Second World War, societies in the East and West looked for new political issues, in part because when capital flows undermined the capacity and the efficacy of national redistributionist politics, old-style politicians looked helpless.
Harold James further noted that politicians instead focused on the environment, on corruption, in short, on issues not simply or directly related to an agenda of redistribution. They felt their voters had become convinced of the hopelessness of conventional politics, which seemed to offer no real choice. For better or worse, the world is 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. There are two major winners: 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; 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. As usual in history, rapid change and significant immigration generate a political backlash among those who see themselves as the losers of change.
Harold James noted that 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, as the World Bank report revealed, 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 reinforce 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. According to Harold James, 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.