By Agnik Dutta, IIM Kozhikode

Abstract

Over the past decade or so, there has been a distinct shift away from the foundations of global
capitalism and globalisation. Reduction in trade resulting from protectionist measures and the
demonization of immigrants and immigration has taken place. This article aims to outline the
causes of such a shift, the consequences, both in the short term and long term, and what
policy makers across the globe can do to combat it.

How Did We Get Here?

Much of the discourse around the move away from globalization begins with a delineation and
rehashing of the events of the global financial crisis which began in 2008. Public opinion is
that a group of greedy bankers were tempted by fundamentally toxic incentive structures [1]
in the banking system to generate extraordinary financial performance at the cost of taking on
hidden but ubiquitous risk. While there is some truth to this discourse, it is important to
understand that the environment which allowed credit to become unruly did not magic itself
into existence. In fact, financial crises of any kind are based on political crises [2].

In the 1960’s, with strong socialist and social democratic governments in power across
Europe, the welfare state expanded dramatically. Lyndon Johnson’s Great Society and the
drastic increase in welfare spending by the Labour Party in the UK are examples of this.
Welfare spending was financed by strong post World War II growth. However, the oil shocks
of the 1970’s prompted a change from the Keynesian approach followed by the world’s
dominant economies. Both the US and the UK (under Ronald Reagan and Margaret Thatcher
respectively) responded with deregulation of the economy, which resulted in weaker labour
regulations, weaker land laws, reduced union power, and allowed firms to become more
competitive, thus helping the economies to recover from stagflation. These measures are
today heralded by many as the beginning of a global economic system called neoliberalism
[3]. Neoliberal policies resulted in a regressive distribution of wealth, leading to increased
returns to talented human capital. For example, the difference in incomes of the investment
banker and the factory worker started to grow (Figure 1). This became a cause of quickly
growing discontent. Middle income wages remained stagnant, and the problem was further
compounded by outsourcing many of the middle-income jobs to emerging economies. The
seeds of strong anti-globalisation sentiment were thus well and truly sown in the 1980’s.
 By Agnik Dutta, IIM Kozhikode

Technological innovation exacerbated this problem of growing inequality. Routine jobs such
as those of a clerk or a production line worker fell prey to automation. Middle class anger
against the destruction of jobs was a very real thing. This very neatly leads to the federal
policies enacted by successive governments in the US which set the stepping stones to the
financial crisis. As the problem of income inequality could not be solved without high-handed
government intervention (which would never receive public support in the US), both the Clinton
and the Bush administrations allowed for easing of credit, particularly for home ownership. It
was, to put it simply, a policy of appeasement from politicians whose time horizons are
relatively short compared to that of the misery resulting from financial ruin of millions of people.
The private sector, led by Wall Street, reacted enthusiastically to the easing of the regulations.
After the banks crashed, many were, of course, bailed out. People who had lost their homes
and their jobs began to feel that they had been left out of the capitalist system, and that the
system was fundamentally inequitable. Democratic support for capitalism declined, and as a
result, some of the pillars of capitalism like free trade and free movement of capital stand
threatened today.

What are the consequences of such a shift?

 By Agnik Dutta, IIM Kozhikode

International trade peaked in the 1990s with the IT revolution bringing about huge growth in
productivity. Tariffs and other trade barriers fell, drastically reducing the costs of trade. The
1990s were also special as there were several political developments which favoured
globalization and the creation of global supply chains. For example, the fall of communism,
China’s move towards a market economy, the unification of East and West Germany all
contributed to growing trade intensity and integration. However, today’s political atmosphere
is anything but conducive to trade. Hikes in tariffs and the possibility of a global trade war
threaten the global capitalist order. Below is a graphic showing how people in the US, other
advanced economies and emerging markets feel about trade today.

Mass support for trade is thus not particularly healthy, particularly in the developed world. The
strongest theoretical support for international trade comes from David Ricardo’s theory of
comparative advantage, yet textbook wisdom has not translated to popular wisdom.

Global capitalism is today threatened by populism, of both the Right and the Left [4]. Populism
has gained political power in the US with Donald Trump, and across Europe, with Presidents
in Italy and Hungary who can only be described as far Right. A new nationalism has thus
emerged, one which harks back to a time gone by when the majority were the dominant
players in societal power structures. This is perhaps manifested most clearly in Brexit, a
decision that no sound school of economics seems to support. Yet British imperial pride and
 By Agnik Dutta, IIM Kozhikode

a genuine disenchantment with the so-called benefits of globalisation prompted 52% of the
population of the UK to vote to leave the EU. The consequences of such a shift are not just
material, but moral. Denying asylum to refugees and deporting the “Dreamers” under the
United States’ Deferred Action for Childhood Arrivals (DACA) appear to be immoral at best,
criminal at worst. The case of Shamima Begum is of particular moral concern. Begum, 19 as
of today, left the UK to join the Islamic State in 2015. She recently made clear her intention to
return home, yet the Conservative government took steps to ensure she was left stateless.
News flooded in recently of the death of her baby son in a Syrian refugee camp. Although the
Tories have been the subject of widespread criticism, they have not changed their stance.

What is to be done?

The first question we should ask ourselves is should we be spending so much time trying to
defend a capitalist system that has proved to be exclusionary and at times corporatist and
elitist. The answer is yes. Capitalism, when regulated by good government and sound money,
brings more prosperity to people than any other system. Free and competitive markets expand
choice, lead to productivity growth and maximize surplus. The global world order is thus
something we should indeed protect.

The only way to ensure capitalism survives is by ensuring mass support for the system. A
more inclusive capitalism is the order of the day. The creation of strong welfare states [5],
driven by universal health care and free and compulsory primary education seem to be
absolute necessities. Access to education and health improves people’s capabilities [6] and
enhances their human capital. If we can achieve a rapid rise in human capital, supplemented
by government programs for industrial training and skilling, we can ensure that there are
opportunities for the masses in the capitalist and globalised world.

References

1) Raghuram G. Rajan (2005) : “Has Financial Development Made the World Riskier?”,
NBER Working Paper No. 11728
2) Raghuram G. Rajan (2010) : “Fault Lines: How Hidden Fractures Still Threaten the
World Economy”, Princeton University Press
3) David Harvey (2005) : “A Brief History of Neoliberalism”, Oxford University Press
4) “Millenial Socialism: The resurgent Left”, The Economist Print Edition, February 14th
2019
5) “Capitalism needs a welfare state to survive: Back to basics”, The Economist Print
Edition, July 12th 2018
6) Amartya Sen (1999) : “Development As Freedom”, Oxford University Press