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Globalization’s Political Fault Lines

NEW YORK – The United Kingdom’s narrow vote to leave the European Union had specific British causes. And yet it is also the proverbial canary in the coalmine, signaling a broad populist/nationalist backlash – at least in advanced economies – against globalization, free trade, offshoring, labor migration, market-oriented policies, supranational authorities, and even technological change.

All of these trends reduce wages and employment for low-skill workers in labor-scarce and capital-rich advanced economies, and raise them in labor-abundant emerging economies. Consumers in advanced economies benefit from the reduction in prices of traded goods; but low and even some medium-skill workers lose income as their equilibrium wages fall and their jobs are threatened.

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In the “Brexit” vote, the fault lines were clear: rich versus poor, gainers versus losers from trade/globalization, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. The same fault lines are appearing in other advanced economies, including the United States and continental Europe.

With their more flexible economies and labor markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. Job creation has been robust, with the unemployment rate falling below 5%, even if real wages are not growing much.

Yet in the US, Donald Trump has become the hero of angry workers threatened by trade, migration, and technological change. In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services.

In continental Europe and the eurozone, however, economic conditions are much worse. The average unemployment rate hovers above 10% (and much higher in the eurozone periphery – more than 20% in Greece and Spain) with youth unemployment over 30%. In most of these countries, job creation is anemic, real wages are falling, and dual labor markets mean that formal-sector, unionized workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits.

Politically, the strains of globalization are twofold. First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalization, are being challenged by populist, nativist/nationalist anti-establishment parties. Second, establishment parties are being disrupted – if not destroyed – from within, as champions of anti-globalization emerge and challenge the mainstream orthodoxy.

Establishment parties were once controlled by globalization’s beneficiaries: capital owners; skilled, educated, and digitally savvy workers; urban and cosmopolitan elites; and unionized white- and blue-collar employees. But they also included workers – both blue- and white-collar – who were among the losers from globalization, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because center-left parties were formally supporters of unions, workers’ rights, and entitlement programs.

After the 2008 financial crisis, globalization’s losers started to organize and find anti-establishment champions on both the left and the right. On the left, the losers in the UK and the US, especially young people, found champions in traditional center-left parties: Jeremy Corbyn in the UK’s Labour Party, and Bernie Sanders in America’s Democratic Party.

The deepest fault lines emerged among center-right parties. These parties – the Republicans in the US, the Tories in the UK, and center-right parties across continental Europe – confronted an internal revolt against their own leaders. The rise of Donald Trump – anti-trade, anti-migration, anti-Muslim, and nativist – is a reflection of an uncomfortable fact for the Republican establishment: the party’s median voter is closer to those who have lost from globalization. A similar revolt took place in the UK’s Conservative Party, with globalization’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party.

In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden, and elsewhere.

But, despite the growing number, organization, and mobilization of globalization’s losers, globalization itself is not necessarily doomed. For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalization are a large – if at times silent – majority. In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalization and technological innovation.

This also why populist and anti-establishment parties are still a political minority. Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity, and painful structural reforms, moderate, pro-European forces remain a majority.

Even in the US, Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. Whether he can win the presidential election in November is highly doubtful.

This is also why pro-European center-right and center-left coalitions remain in power in most of the EU. The risk that anti-EU parties may come to power in Italy, France, and the Netherlands – among others – is rising, but still remains a distant possibility.

Finally, economic theory suggests that globalization can be made to benefit all as long as the winners compensate the losers. This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits, and portable pensions).

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For workers to accept more labor mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems.

The backlash against globalization is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs. Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners.