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Is globalisation over?

7th July 2016

In the wake of the Second World War, leaders of the Western world wanted to make war ‘materially impossible’ and as such sought to foster prosperity and interdependence by expanding global trade – but what was once a beautiful dream of unity is crumbling. The Brexit vote and the rising politics of protectionism in the US are just examples of the backlash that has shaken the “globalisation is good consensus”. While many who advocate for free trade are reeling, as highlighted in a recent Economist article, a few brave economists saw it coming.

In the 1990’s, Harvard economist Dani Rodrik pointed out that deeper economic integration required harmonization of laws and regulations across countries, as differences could act as barriers to trade. But in order to achieve greater integration, Rodrik argued, national leaders would have to disregard the will of the public that elected them, or the nation state would be dissolved as authority moved to supranational bodies. Rodrik calls this trade-off a trilemma – societies cannot be globally integrated, completely sovereign and democratic – only two out of three were possible. While Rodrik believed the sovereignty of nation states would be the item societies chose to discard, Brexit signals economic integration may be more vulnerable.

Early in the 21st century, Alberto Alesina from Harvard and Enrico Spolaore from Tufts University took a different view of the trade-offs, noting that although advantages such as large internal markets and more resources for national defence follow bigger countries, it comes at the cost of a larger and more heterogeneous country with great variation in political views, making it more difficult for politicians to satisfy its citizens’ political preferences. Global integration, they argue, reduces the economic cost of breaking up big countries, since the smaller entities that result will not be cut off from bigger markets. Thus global reduction in barriers to trade can partly explain the simultaneous growth in the number of countries with national fractures often leading to political instability and violence.

At the City University of New York, economist Branko Milanovic argues that periods of global integration and technological progress generate rising inequality which triggers two forces: governments tend to increase redistribution and invest in education; but at the same time rising inequality also leads to upheaval and war.

The distribution of the costs and benefits of globalization are perhaps the most critical factor. Nobel recipient Joseph Stiglitz warned of the influence of rent-seeking companies on trade that harm workers and erodes support for trade liberalization. While some of the costs hit individual cities or industries hard – such as Detroit and the car industry in the US – the benefits are more diffuse and difficult to quantify.

Understanding why globalisation is difficult is key to making it work. The risk associated with sections of the community feeling “left behind” and looking for something to blame have been under-estimated. Unless the distribution of costs and benefits are better managed and explained, further integration will likely fail, increasing calls for “taking back control”.