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Poor Leadership Makes Bad Globalization

MEXICO CITY – Since the 1950s, European countries have debated the costs and benefits of regional integration. But not until the United Kingdom’s “Brexit” referendum did the debate revolve around such central issues as globalization, free trade, immigration, and their economic effects.

Voters in the UK made a mistake in deciding to leave the EU; they were hoodwinked, most notoriously by Britain’s new foreign minister, Boris Johnson. But Eurocrats and Europhiles would also be mistaken were they to ignore the lies that animated the “Leave” campaign’s cause. Those lies were effective in the UK, and they could be effective in other EU member states, and in democracies around the world, as well.

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Continuing toward “ever closer union” in Europe won’t be easy. Europe must grapple with many issues simultaneously, including refugees, immigration, sovereign debt, high unemployment, and a welfare state that no longer delivers what it promises, despite high taxation and the availability of enormous resources to finance it. To meet these challenges, EU leaders will have to build a strong constituency by directly addressing Europeans’ needs and demands.

Globalization, free trade, immigration, and inequality have been long ignored by elites elsewhere as well. The free-trade obsession of US Presidents George H.W. Bush and Bill Clinton in the 1990s, and of successive Mexican governments, made it politically virtually impossible to compensate those who were adversely affected.

Now, 20 years after this policy failure, it is no surprise that alienated voters in the United States are flocking to Donald Trump, the Republican presidential nominee, just as many on the left flocked to Bernie Sanders, the Vermont senator who challenged Hillary Clinton for the Democratic nomination.

Both outsider candidates have tapped into American voters’ grievances and fears. In Trump’s case, this has made for a revolting spectacle, full of pandering to anti-Muslim and anti-Mexican sentiment. In the case of Sanders, US voters have been exposed to some appealing ideas, such as free college tuition and universal health care, though these policies and others remain politically unrealistic.

Both responses are the result of national leaders’ failure to mitigate, or even acknowledge, the results of policies instituted over the past 20 years. Any effort to begin correcting this failure must be based in reality. For example, Trump and Sanders supporters may be surprised to learn that many new manufacturing jobs were created in the US since the Great Recession of 2008-2009, as well as after the enactment of the North American Free Trade Agreement in 1993. Many of these jobs were the result of surging exports to China, Mexico, and a few other smaller countries with which the US negotiated trade deals (Chile, Peru, and Colombia, among others).

Of course, the transfer of millions of manufacturing jobs to countries like China and Mexico partly offset this trend, even if it could reasonably be argued that more jobs were created than lost; that the US became more competitive thanks to this shift; that China has transformed itself into a major consumer market; and that even Mexico has made some progress.

The main problem in the US has been the type of jobs that filled the gap after manufacturing jobs migrated elsewhere. This was missed by policymakers concerned with macroeconomic outcomes. But it was not missed by people in their fifties or sixties who lost a $30-per-hour job with health care and retirement benefits, and had to settle for employment at half the previous wage and few, if any, benefits.

Policymakers didn’t care about the victims of globalization, because they didn’t believe they had to care. The market would sort everything out on its own. It didn’t. But that hasn’t taught policymakers a lesson. The Trans-Pacific Partnership trade negotiations came to a favorable conclusion last year partly because, again, little was done to protect US workers.

A similar anti-globalization surge has appeared in Mexico, where NAFTA was always oversold and over-criticized. NAFTA brought about the export boom that many hailed and predicted, but it did nothing to stem northward immigration. It made many of Mexico’s industrial and agricultural businesses more competitive, but brought only a small and temporary increase in foreign investment as a percentage of GDP.

Moreover, while NAFTA locked Mexico into many needed and desirable economic reforms, it never delivered on the promise of growth: Since 1994, annual economic growth has averaged just 2.5% – low by emerging-market standards – while the figures for productivity, employment, and wages are similarly disappointing.

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After NAFTA, the policies needed to mitigate globalization’s negative effects – such as higher minimum wages for manufacturing workers – were never implemented. The entire country is paying the price today, and Mexicans are unhappy. While NAFTA is not entirely to blame for a generally mediocre state of affairs, it has contributed to anti-establishment sentiment, which could affect the outcome of the 2018 general election.

Popular backlash against disruptive change is inevitable, and occasionally serves as a useful counterweight to heedless leadership. What is new today is the extent of the backlash in Europe and North America, which many pundits and policymakers believed were better equipped than ever to manage change. Judging by the reaction of voters in Britain, the US, and Mexico, no country is immune to its leaders’ mistakes.