In my darkest hours I fear it will become the image of the century; a mythic symbol of the chaos shaking the West. High up in the lush marbled lobby of Trump Tower before a vast golden door, President-elect Trump poses gleefully with Nigel Farage and the leaders of the British Brexit movement, each delighted with themselves.
It wasn’t supposed to be like this. Thirty years ago this year, I was sitting in a student common room in Manchester, watching in awe as students, workers, citizens defied the soldiers, took out their hammers and battered the Berlin Wall into history.
What followed was what economists call the Great Moderation; a golden era of extraordinary growth around the world, as politicians, New Labour amongst them, stitched together what Bill Clinton liked to call, a ‘world without walls’. Trade deal after trade deal fell into place; NAFTA; China’s admission to the World Trade Organisation; the doubling of the size of Europe. It was quite a fin de siecle. And then it crashed. And the surge of populism that followed now threatens the post-war order.
So what has happened?
Let’s tease apart the short run from the long run. In the short run, financial crisis are often good news for extremists. In a study of over 800 elections over the last 140 years, the far-right increased their vote share by 30% after a financial collapse. And this crisis was no different. Across Europe, the populist vote (on left and right) has soared from 9.1% in the 1960’s, to over 26% in the 2010’s. In countries like Italy, France, Greece, Spain, Hungary and the UK, the surge in populist parties like the Five Star Movement, Front Nationale, Syriza, Podermos and UKIP were extraordinary.
But the long run change in politics and economics is even more important. Thirty years on from the fall of the Berlin Wall, we can now stand back and see in plain sight just how our economic model for the last thirty years of globalisation has helped fuel the chaos.
Our method of globalisation has produced profound new inequalities; indeed, just twenty six people now own as much wealth as the poorest 3.7 billion people. These inequalities help foster a disgust with elites that is the rocket-fuel for populism. As a recent paper confirmed; “more unequal countries do indeed exhibit stronger populist support.’
Beneath the seething outrage we can now divine just how globalisation created losers who we simply did not compensate - and who have responded by voting to wreck the status quo.
Economists have long known that trade is good for growth. In one of the most cited studies of nations that globalised after 1980, David Dollar and Aart Kraay found “a statistically significant and economically meaningful effect of trade on growth: an increase in trade as a share of GDP of 20 percentage points increases growth by between 0.5 and 1 percentage point a year.”
But the question then remains: who gets the gains? And the answer is: not ordinary working people. As Dani Rodrik recently put it: ‘[T]rade generically produces losers…No pain, no gain.” These studies are now well-advanced in America:
- A study of NAFTA for example, found that blue collar workers in industries exposed to imports, saw real wages fall. Between 1990 and 2000, affected workers saw pay-packets grow 8% more slowly than workers in unaffected industries, while general welfare gains totalled an under-whelming 0-0.08%.
- China’s accession to the WTO, on the other hand, created huge gains for firms like Wal-Mart, which made its owners, the Walton family, amongst the richest on the planet. But the ‘China Shock’ cost perhaps as many as 2 million manufacturing jobs between 1999-2011.
This seismic change showed up on election day. Amongst the states hit hardest by the China Shock - Ohio, Pennsylvania and Michigan - voters flipped to Donald Trump.
But we can now see a similar effect at work fuelling in the Brexit vote.
Even though the UK was a very open economy before the latest era of globalisation, much changed. Between 2000 and 2015, UK imports (by value) nearly doubled. This had a huge impact on the manufacturing industry that was once the heart and soul of the towns and cities created around the factories of the industrial revolution, and which once provided so many jobs to lower-skilled, less trained workers. Between 1997 and 2015, manufacturing jobs fell by almost a third - that’s 1.4 million workers - and the import shock from China and the A8 proved to be the biggest shock of all; imports from China, between 2000 and 2015, rose five-fold, and imports from the A8 rose by a factor of six.
This huge rip-tide in our economy created massive waves for some workers. As one study found that ‘the combined effect of import competition from China and the A8 accounts for between 22 and 35 per cent of the reduction in the manufacturing share between 2000 and 2015’. This hit workers hard. In fact, between 2000 and 2007, ‘UK workers initially employed in industries that suffered from high levels of import exposure to Chinese products earned less and spent more time out of employment compared with individuals that were in industries less affected by imports from China’.
Overwhelmingly, these voters voted to Leave the EU, not least because those hit hardest by the import shock of globalisation, went on to suffer ‘globalisation without compensation’.
In any policy debate, we have a question of scale and speed of a solution. And we can now conclude that governments of both left and right, radically underestimated the speed and scale of the redistribution needed to compensate the ‘losers’ from the ‘import shock’ of globalisation.
To explore this, we married together a rough analysis of data on the ‘import shock’ calculated by academics Pierro Stannig and Italo Caltone, with data on public expenditure prepared by the Centre for Cities.
Let’s imagine for a moment that over the last decade, the UK successfully redistributed the gains of trade to those areas hit hardest by the import shock. In this case, we would see a rise in public spending in the areas hit hardest by globalisation.
In fact we see the opposite. The big towns and cities hit hardest by the ‘import shock’ actually see the bigger cuts in public spending - and this appears to be correlated to the Brexit vote.
So, if we take the big towns and cities that voted to ‘leave’ the EU, we can see that most suffered a big import shock over recent decades. But rather than benefit from any kind of compensation in the form of higher public spending, these areas all saw big cuts in public spending.
In fact, the correlations show that the places with the worst import shocks actually suffered the deepest pubic spending cuts. So, Blackburn, for example with an import shock score of 0.7, suffered a 27% cut in local spending. With some exceptions (like Blackpool), areas with a very high leave vote suffered not only big import shocks, but big public spending cuts as well.
It is now vital for us to learn the lessons of what went right and what went wrong for the years ahead because the disruption of globalisation will be put in the shade by what lies ahead in the fourth industrial revolution when AI and automation risks a wipe-out of perhaps 1.1 billion of the world’s 3.2 billion jobs. We know these profound shifts will demand a new social contract for the 21st century; for workers; for families and places. So we had better get on with designing what it looks like.
That means radical reform to the three major systems at the heart of any political economy; the tax system, social security - and the financial markets.
The tax system will inevitably have to shift and rebalance to tax wealth more effectively. And international cooperation will have to be patiently advanced, step by step, to bring more and more of the wealth created by Technopolies but hidden tax-free, into the tax system.
Second, social security will have to change as the public demands a very different kind of social security system; a system which not only retrains workers as technology wipes out old jobs, but which helps families both replace income in times of misfortune, and build up wealth of their own over the course of their working lives.
Reform of financial markets will, I suspect, need be more radical.
Bluntly, finance needs returning to its original purpose. The history of finance demonstrates that early financial pioneers often saw themselves as social reformers. Henry Duncan in Scotland who opened one of the first savings banks, or Friedrich Raiffeisen in Germany who created the first agricultural credit union, saw their activities as having social purpose, in much the same way as Nobel Peace prize winner Mohamed Yunus does today in Bangladesh. Their activities are critical to the improvement of the lives of poor people, and critical to creating inclusive growth. But there’s not many in the finance industry who see the business in that way. Yet the ‘purpose of finance’ is not a question simply for experts. It is a question for all of us. And unless this debate begins to define the hallmarks of a successful, inclusive, financial system, it will prove impossible to re-regulate the industry at the very hard to today’s capitalist system. There can be no reform of capitalism, without radical reform of financial markets.
‘Progress’ wrote Nye Bevan in the only book he ever penned, ‘is not the elimination of struggle - but rather a change in its terms’. Brexit has changed the terms of our struggle. Its time for a new agenda to match.
 Quoted, Nat O Connor, Three Connections Between Rising Economic Inequality and the Rise of Populism, Irish Studies in International Affairs, Vol 28 (2017), pp29-43, p.33
 L Pastor And P Veronesi, Inequality Aversion, Populism And The Backlash Against Globalisation, Working Paper Number 20 18–53, August 1, 2018 Becker Friedman Institute
 See: David Dollar and Aart Kraay, Trade, Growth, and Poverty,
 D Rodrik, Populism And The Economics Of Globalisation, Journal Of International Business Policy, 2018
 Hakobyan And Mclaren, 2016
 Calienda And Perro
 Francesca Foliano* and Rebecca Riley, INTERNATIONAL TRADE AND UK DE-INDUSTRIALISATION, NIESR, 2018
 Francesca Foliano* and Rebecca Riley, ibid.
 ‘International Competition and Labor Market Adjustment’ by João Paulo Pessoa, CEP Discussion Paper No. 1411 (http://cep.lse.ac.uk/pubs/ download/dp1411.pdf)
 See https://blogs.lse.ac.uk/brexit/2016/11/23/globalisation-and-brexit-areas-that-voted-to-leave-were-most-affected-by-the-chinese-import-shock/