The year 2016 will go down as a landmark year. The UK’s exit from the European Union (EU), also known as Brexit, and the election of Donald Trump as U.S. president appear to challenge the process of global integration, giving voice to a new populist agenda. Political risk has emerged at the forefront of investors’ minds. For the first time since the Second World War, globalization is facing the real prospect of stalling or even reversing, with profound consequences for the global economy. Gregg McClymont (GM), Head of Retirement Savings at Aberdeen, chaired a panel to discuss changing attitudes to globalization and where we go from here, with John McDermott (JM), Global Public Policy Editor at The Economist magazine, Iain Martin (IM), political commentator and author and Lucy O’Carroll (LO’C), Chief Economist at Aberdeen.
GM: Few people anticipated Brexit and Donald Trump’s presidential election victories. Pollsters on both sides of the Atlantic predicted a win for the status quo liberal establishment – a “Remain” vote and a Hillary Clinton victory. The behavior of financial markets reflected this consensus in their under-pricing of Brexit and Trump.
LO’C: Financial markets view globalization as a good thing in terms of trade, employment and global capital flows. Retaining the status quo is rational from this perspective. The level of frustration among large sections of the population was therefore underestimated.
An economic and cultural gulf has emerged between elites and the rest.
IM: An economic and cultural gulf has emerged between elites and the rest of the populace, particularly in the U.S. Seismic changes in media have exacerbated this, with false claims and the emergence of fake news stories gaining credibility on social media sites. The hazing of judgment that this post-truth world creates goes some way to explain why polls got it so wrong. The media and market elites were somewhat adrift because the rules have changed.
JM: The U.S. election went down to the wire – if 100,000 votes in the Rust Belt had gone to Clinton instead of Trump, it would have been President Clinton. The collapse in Democratic support in the Midwest former manufacturing heartlands was striking, however. Macomb County, Michigan, for example, was a place where Obama won by 9 points in 2008 but Clinton lost by 9 points in 2016.
GM: What economic and cultural forces are driving the insurgencies against free trade orthodoxy?
LO’C: The global financial crisis played a central role in shaping how people have thought about their financial well-being over the last few years. But we can look further back to the 1980s – at least in the UK – and the hollowing out of the country’s industrial base. Many people lost highly paid, skilled manual jobs in the steel and coal industries. An example would be the town of Redcar, and Teesside,* famous for its steelworks, where jobs were lost and families and communities disrupted. While some areas have recovered, the feeling of “striving and betterment” has gone, replaced by a frustration that the establishment is not listening to them. The solution is targeted investment in the form of infrastructure projects and capital spending.
JM: The last 30 years have seen a divergence in income between the affluent, educated, multicultural and generally younger urban middle class and rural voters who feel left behind by economic and social change. Regarding causes, the question is whether economic deprivation is the main driver. For example, the average income of the Trump voter was actually quite high. Furthermore, a recent poll found that the best predictor of whether people voted for Brexit was independent of wealth; it was whether they agree with the death penalty.**
IM: The recent political upheaval reflects the importance of nationhood and rejects supra-national decision-making. During the 1990s and 2000s, supranational bodies like the EU and United Nations have dominated global political and economic affairs. The World Trade Organization governs and approves the terms of international trade agreements rather than national parliaments and legislature. This orthodoxy prevailed until the global financial crisis, when responsibility for dealing with the fallout arrived at the door of nation states, and not international bodies. A breakdown of trust ensued, compounded by government-imposed austerity programs and bank bailouts, has fed much of today’s populist attitudes to economics and migration.
GM: Should we reconsider who is voting for or against globalization? For example, many people who voted for Brexit reside in leafy, affluent villages and not northern industrial towns.
LO’C: Age was also a big differentiator. Generally, older voters who could remember life before Britain joined the EU chose Brexit; younger voters who’ve only known Britain as an EU member chose “Remain.”
JM: Historically, young people led many nationalist populist movements. In contrast, this year has seen “populism in one’s dotage.”
GM: Does education level correlate with voting patterns?
JM: I think so. University education is a very powerful explanatory predictor of whether people voted for Trump. This is intuitive – a university education encourages a liberal worldview, as well as higher incomes than the median.
LO’C: Economists generally failed to convince the British and American electorates on the benefits of the free trade and free movement of labor. Part of this is because the gains from trade have not been evenly shared.
IM: I would add that voters in Britain and increasingly in France and other European countries are questioning the benefits of free movement of people.
GM: What are your thoughts on European politics given the upcoming Italian referendum in December and elections in Netherlands, Germany and France next year?
The EU desperately needs less regulation and simpler and flatter taxes.
IM: The EU is a dysfunctional organization in serious trouble. It desperately needs radical reform and in particular, less regulation and simpler and flatter taxes.
JM: Liberals should not be offering a populism-light version of politics. Historically, liberalism has triumphed when it offers an alternative optimistic vision. For example, former French Prime Minister Alain Juppe, now running for French president, has promised a referendum on France’s membership of the Eurozone (a “Frexit” vote). Rather than occupying far-right candidate Marine le Pen’s ground, centrists should offer a more positive alternative.
GM: Economic growth is the best way to turn the tide of rising populism. Growth can assuage concerns around globalization and allow politicians to pursue progressive redistributive policies. But declining productivity across the developed world is making this a formidable challenge.
LO’C: I agree. Low productivity could be a reflection of how firms have responded to the global financial crisis. Many reduced investment as a result. Encouraging firms to increase investment and boosting education levels among workers could improve labor productivity.
IM: It’s possible that the U.S. is in a better position than we think. A future President Trump could oversee an infrastructure revolution and re-shore wealth from overseas. With shale oil, America may soon be completely energy-independent. As long as some of Trump’s more extreme ideas are constrained by Congress, America’s future could be bright.
JM: Frankly, the chance of Trump doing something impulsive and stupid is probably quite high, though.
GM: The role of innovation and the digital revolution may turn out to be instrumental in boosting growth. Can technology in the form of artificial intelligence (AI) and automation solve the productivity puzzle?
Artificial intelligence is already revolutionizing some industries, particularly healthcare.
JM: I believe it can. Previous technologies like the car and electricity have led to a latent productivity boost 20 to 30 years after the invention. This may be the case with AI. Interestingly, AI is already revolutionizing some industries, particularly healthcare where we will likely see massive improvement in diagnostics.
GM: A darker side to AI is the fear that robots will replace people in many jobs, leading to mass unemployment. Oxford University estimates that around 47% jobs will be lost to computers over the next two decades.
JM: I’m skeptical of this figure but accept the nature of many jobs – from professional fund management to journalism – will change. For example, 700,000 people in the UK make a job through driving. Even if one is skeptical about self-driving cars, many drivers are likely to lose their jobs. The impact of technology on the labor market is unlikely to be equal or fair. We must therefore consider the distributional consequences of the growth of AI.
IM: The finance industry is ripe for disruption. Blockchain is a case in point. I agree that automation will affect employment. Nevertheless, I’m optimistic that London can maintain its position as a leading financial center in the digital age.
We must face up to the real and potentially negative impacts that Brexit and Trump’s election victory will bring. Political establishments may end up consuming so much time and effort on dealing with these events that they put off much needed structural reform. That would be a mistake.
Ultimately, if we all care about capitalism and want it to flourish we must think long and hard about how we got here and how we should best move forward.
*Companies mentioned for illustrative purposes only.
**According to data from the British Election Study.
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