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Brexit – will it change our way of life?

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When a person living in Pata, a small town in Uttar Pradesh, buys a Canon camera from Amazon and posts a picture of a flower in Facebook, we do not think of globalization – because globalization is the way of life, even in a small town like Pata. Over the last few decades, the world has steadily globalized – there has been a multitudinous increase in cross-country trade, capital flows across borders has increased multifold and voluntary movement of people across countries has grown steadily. The word globalization itself has become a commonly used word, but rarely mentioned in books before 1980s (as found searching through Google Books).

With United Kingdom voting to exit EU, possibly the most ambitious project of globalization, questions have been raised about this de facto state of the world. Not only this Brexit vote, but Donald Trump’s nomination as a Republican candidate and the possibility of him becoming the US President, and rise of many nationalist parties across countries in Western Europe, all seem to question the virtues of such a globalized world.

Has globalization not been good for the world? Why this backlash against globalization? Economists generally agree that increased trade, capital flows and movement of skill are good and it increases overall welfare of the population. To be sure, the world has seen unprecedented growth during this era. The aggregate real income has increased pretty much across countries. Yet, it is also known to economists that this gain is not uniform – there are some who gain more than others, some even lose. Indeed this has been the case through this episode of globalization. A manifestation of this is the increased inequality, particularly, in recent years, almost across the globe.

This is a matter for concern and also a cause of this current backlash. When some people do not benefit from the growth, they are dissatisfied and feel disenfranchised in the current setup. It is not hard to imagine these people revolting against the current disposition – maybe through a Brexit vote. Who are these people likely to be? These are people whose skills are easily substituted, either by capital moving to countries or areas where such skills are plentiful and cheaper or by people immigrating to areas where such skills are in demand. In general, these are the people with lesser education. It is relatively easy to find large number of people who can type in data or people who can serve food in restaurants, but much more difficult to find a replacement for someone who designs solar panels and batteries or someone who optimizes the use of aircrafts for an airline. Thus it is likely that people with low education and low skill will be the one to be disenchanted with the current system, something that comes out in the Brexit vote – districts with higher number of college graduates have tended to vote to remain within EU.

There has been another feature of this era of globalization. While inequality within countries has increased, inequality across countries has decreased. What it means is that countries that were poorer, like China and India, has grown at a rate faster than those that were richer to begin with like UK and USA. Income levels in the poorer countries have come closer (though they are still quite apart) to those in the richer countries. For the middle class in USA and some Western Europe countries, particularly blue collared workers, the increase in real wage has not been significant, if at all positive. In UK, for example, between 2008 and 2013, the median real wage fell significantly. During the same period the real wage has increased in most emerging economies. In Poland, for example, it has increased by over 10% during the same period. This can create a sense of loss and resentment. More so for people who have memories of a time when their relative purchasing power – relative to both the rich in their country and the middle class in emerging economies was higher. Could this also be a cause of this push against globalization? It is possible. It is also very easy for politicians of different stripes to use, and exacerbate, this resentment - as has been witnessed in the campaigns for Brexit in UK and by Donald Trump in USA where references to India, China and other emerging economies were made frequently. Not surprising, therefore, that people over the age of 50 voted for Brexit in much larger numbers than the younger group. It is probably worth noting here that the older generation saw the process (and, the impact) of globalization and carried memories of a different world, however the newer generations were born into this era.

What does the future hold for the world economy, and particularly for emerging economies like India? In the short run, the dominant factor will be the uncertainty of the process. It will take at least two years for UK to disentangle itself from EU, but also questions like what will happen in other European countries? Will we see EU unraveling? What will happen in the US Presidential elections? These worries will have an immediate impact on many economic activities, definitely on cross border transactions. India may see some impact in the near future due to lower foreign investment levels and trade volumes not increasing (or falling).

However, what matters most is what happens in the longer run. What kind of world order emerges – are we headed to a more fragmented world? If isolationism increases, clearly this will have an impact on the world growth rates. Even if there is no increase in protectionism, increase in fragmentation will increase the cost of trade and doing business. This cost can be disproportionately more for less developed countries, particularly because of shortage of specific types of skilled people required in this new world order. For example, just getting enough number of well trained staff to negotiate trade and investment deals with larger number of countries might be difficult for the governments. Similarly for businesses, negotiating with varied norms and rules in increasing number will be challenging and costly.

It is not yet certain though, that we are entering into such a world. To ensure that we don’t, the roles of governments and policy makers are important. The most important policy challenge, in any country, is to find a way to deal with the rising inequality. We will have to find a way to ensure that gains from globalization are more evenly spread, through better healthcare systems, cheaper education system, and creating more opportunities for those adversely affected by the process of globalization. In India, it is doubly important for us to invest in education, skilling and healthcare. This will not only help us decrease inequality, but these are also the essential ingredients for us to keep growing at a high rate, no matter what new world emerges.

The greatest hope that the future of the world is better than what Brexit makes it to be at this moment is the fact that the younger population in UK has overwhelmingly rejected the idea of an isolationist and segregated world and had voted to continue with EU. It does seem that they value the opportunities globalization creates at an individual level and overall. We should not forget that the last few decades of globalization has increased aggregate income across the world and decreased inequality across nations, and in the process pulled millions out of the poverty. The world is better off because of that.

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