Populists and Globalization
Structural losers, abysmal politicians, and mobile workers

“When the winds of change blow, some build walls, others build windmills.“ (Chinese proverb)

Globalization is once again being criticized. Its opponents are holding it responsible for nearly all the evils of this world. The list of sins is a long one: growing poverty, rising unemployment, stagnating prosperity, massive inequality, plutocratic democracies and incompetent politicians. All of this and much more is said to be caused by worldwide open goods and factor markets. The “End of History“ (Francis Fukuyama) dream is over. In truth, political adversity threatens globalization. Perhaps Mark Twain was right when he remarked that history does not repeat itself, but it rhymes. Populist tendencies already ruined the first wave of globalization in the previous century. They sowed the seeds of intervention and protectionism. The two world wars did not just destroy open markets. Today as well, populist parties everywhere have the upper hand.  They agitate from the left and right against open markets, and they have the sympathy of the enraged citizens. The Doha Development Round has been stalled for years. The fight against TTIP is a mass phenomenon. The primal fear of the strangeness of strangers gives rise to initiatives against immigration. Does an end to the second wave of globalization threaten?

Structural Losers

You have to give the opponents of open markets one thing. They have succeeded in stylizing globalization as a scapegoat for undesirable developments. Open markets are blamed for much of what goes wrong economically, and that is astounding. After all, the fractious guild of economists has long been in agreement on one thing: worldwide open markets improve the economic situation for all participating countries. Global trade and international migration increase the prosperity of all nations. In fact, globalization has succeeded in speeding up external convergence (here). The global inequality of prosperity has been reduced. But there is also unease about globalization. Open markets do not only produce winners in the countries involved. The structural change that is accelerated by globalization also creates losers. And one more thing provokes criticism, namely that worldwide open markets increase inequality within the countries. Incomes are distributed less equally. External convergence and internal divergence are two sides of the same coin. Finally, globalization curtails national sovereignty. This applies not only economically, but pertains to political decisions as well. Some critics expect a “race-to-the-bottom“ with regard to social and environmental standards. Others speculate that democracy is being eroded.

Globalization is an effective drug against economic stagnation. However, it is not free of risks and side effects. Structural change leads to a process of creative destruction, increasing the demands on national labor markets. The inequality of incomes requires more efficient instruments from the national government to reduce poverty and increase equal opportunities. Globally more open markets affix visible price labels to the national social and environmental standards. They indicate that higher standards are not free. But real “worlds of capitalism“ show that national sovereignty is still possible. These risks and side effects, however, cannot explain why populist activities have increased. The process of de-industrialization has been going on for a long time already. Many countries already have the worst behind them. Germany is an exception (here). The wave of growing (market) inequality has also passed its apex. In continental and Nordic countries, state redistribution has taken the sting out of inequality from the start. Finally, recent empirical studies (here) show that world-wide (goods) markets have triggered a “race-to-the-top“ with regard to social standards. The acutely growing populism can hardly be explained by these risks and the side effects of globalization.

Abysmal Politics

Voters are rebelling, especially in Europe but also in the USA. It is no longer only the lower income brackets that are politically turning their backs on the traditional parties. Enraged citizens seek a new political homeland in droves. This also increasingly includes voters from the middle class. Tectonic faults are turning the political landscape upside down. A growing number of voters opt for populists at the extreme left and right margins of the party spectrum. These parties are more than a passing fad. In spite of their ideological differences, they are united: they maintain their profound aversion to open markets. One reason for this mistrust of the markets is the growing fear of the future, driven by long declining economic growth. Broad sections of the population are concerned about their own futures and those of their children. The cause, however, is not globalization. The main driver of growth, productivity, has been limping along for some time (here). The rate of technical progress is slowing. This is the “new normal“. The reasons for this are still largely unknown. Globally open markets, however, are not the villains, quite the opposite. Rather, greater competition drives innovation.

A large majority of the population is of the opinion that the markets cannot fix this issue, and that politics must set things straight. According to them, political action supported by the expertise of experts should whip economic growth back into shape. This expectation has been significantly reduced as a result of the financial and euro crisis. The financial crisis has shaken confidence in mainstream economic experts. The Chicago economist Luigi Zingales has gotten to the heart of this issue (here), pointing out that in the past science has defended the entire financial sector far too often. Harmful practices were often overlooked. The euro crisis has also damaged the credibility of financial institutions. Rules are not enforced in the EU, and promises are broken. Politics has autonomously overruled the agreed upon rules of the EMU. Rules pertaining to debt are disregarded and a bail-out has been implemented. An unrestrained ECB pursues the path of monetary government financing. In the refugee crisis as well, the agreed upon rules of Dublin and Schengen were not worth the paper on which they were written (here). Politics was unable to find viable solutions. Burdens have been “outsourced“ to Turkey and solidarity is an alien concept in the EU. This is how confidence in politics is destroyed. Populist parties win because confidence in social elites has been lost. This has little to do with globalization.

International Mobility

Even if abysmal politics is driving the populist movement, open markets are not yet off the hook. International mobile factors play a central role. Mobile capital and mobile labor have always aroused opposition among broad sections of the population. The many financial crises were admittedly set in motion by real mistakes. Internationally mobile capital, however, often generated the spark that set off the crisis.  It is not unknown to economists that mobile capital can intensify financial instability. This is testified to by the well-known monetary policy trilemma (here). The financial crisis has further strengthened the aversion among the population to international capital flows. At the present time, internationally mobile labor is, however, a central point of the criticism from populist parties. Large migratory flows to Europe have become the straw that broke the camel’s back. In many immigration countries, the fear is that massive immigration hurts the interests of the local population. The existing residents are not just concerned about their jobs. They also fear that they will be financially burdened if immigrants enter their demographically battered, under-financed social security systems.

The economic verdict on migration is clear: it increases the prosperity of all countries involved. But as in the case of international trade, not all in the countries are winners. Some also lose, at least in the short term. Due to lack of language skills and national qualifications, immigrants are more likely to compete with the migrants already living in the country. Wage and employment effects are marginal for locals. This is even true if immigrants find employment (here). It is all the more true if foreign workers migrate to the welfare state. However, the actual impetus for populist parties does not come from the economic effects of immigration. Migration often meets with resistance in the population not only because production factors enter, but also because foreign people come into the country. With their arrival, culture, traditions, and behavior become more diverse. It is known from sociological research that the mutual trust (social capital) in a society decreases as the ethnic and cultural diversity increases, and that at the same time an exchange between the individual groups does not actually exist. Locals fear the loss of a supposed or perceived national identity. This is true worldwide. Enmities thrive. Immigrants become scapegoats for all sorts of social and political mistakes. Resistance to immigration increases. The people’s fear of losing their own identity is the fertile soil on which populist parties thrive.

Social Market Economy

A world of isolated markets is unfree, poor, and hostile. Worldwide more open markets are essential, protectionist tendencies harmful. Politics should do everything it can to revitalize the stalled process of globalization. Multilateral solutions are preferable to regional and mega-regional agreements. Conclusion of the Doha Round would clearly be the best step on the path to more open markets around the world. Mega-regionals such as TTP, TTIP or CETA are a double-edged sword. Free trade agreements between rich countries or groups of countries are undoubtedly advantageous for the concerned parties. However, they hinder the conclusion of multilateral agreements, which are necessary in order for less developed countries to benefit from open markets as well. But it would be urgently necessary to involve more poor countries more strongly in the international division of labor. Greater prosperity, more freedom and lasting peace would do them good. But the rich countries would also benefit. This would not be caused by trade gains alone. The causes of the flight of refugees would be reduced. Selective immigration to rich countries would be mitigated. Populist parties would be divested of an important issue.

However, it is not just a matter of agreeing on efficient rules for open markets worldwide. One also has to observe them. This applies not only worldwide, but also to regional integration areas such as the EU. Only politics in the EU that once more conducts itself according to the rules can cut the ground from under the feet of populist parties. However, in this I do not have much hope given the miserable quality of European policy. And there is another essential element. The losers in the process of globalization must be effectively assisted. This is, first of all, a matter of providing material support for people in acute emergencies. An incentive-compatible fight against poverty is essential (here). More important, however, is to enable people to help themselves. This is most likely to happen if social mobility is increased. In this case greater investment in human capital is the most important thing. This requires three things: stable families, better schools and flexible labor markets (here). It seems as if the Nordic countries have handled this problem better than others. They combine increased economic freedom (more open goods and factor markets) with a welfare state which engages less in direct redistribution, instead redistributing indirectly through investment in human capital.  This is more efficient as well as fairer. Perhaps this is the modern form of social market economy.

Conclusion

Worldwide open markets are in bad shape. The process of globalization has been stagnating for some time. The enemies of open markets have the upper hand. Risks are over overemphasized, opportunities are played down. There is a powerful influx into populist parties on the left and right sides of the political spectrum. None of this is good for the economy or for democracy. Interventionism and protectionism are once more socially acceptable. International trade is hampered; mobile capital is fiscally discriminated against, labor held up at national borders. Politics is asinine, especially in the EU. There, agreements are rarely upheld. Rules are unceremoniously broken. The actual problems go unsolved. They are passed on as part of a “blame game“, and at round tables they are put on the back burner. All of this destroys confidence in traditional parties. Yet the second wave of globalization is not yet history. It begins at home. Competitive goods and service markets, more flexible labor markets, and functioning capital markets would be the order of the day, comprehensive structural reforms and solid budgets the means. However, these are nowhere to be seen, especially in Europe. These are not good prospects for Europe and globalization.

Hinweis: Dieser Beitrag ist die englische Version von „Populisten und Globalisierung. Strukturelle Verlierer, grottenschlechte Politiker und mobile Arbeitnehmer.“, der am 13. August 2016 in „Wirtschaftliche Freiheit“ erschienen ist. Er wurde von Michael Labate übersetzt. Herzlichen Dank!