Brexit and the Open Wounds of Globalization

June 30, 2016 9:00 AM

Globalization and free trade are fast becoming dirty words in the Western political vernacular. That’s because they are all too easy culprits for major unforeseen shocks—like the 2008 financial crisis or, more recently, the United Kingdom’s decision to exit the European Union. The solution is not to end capitalism or reverse globalization but to better understand and address the widespread dissatisfaction associated with the concept.

What does the empirical evidence say about globalization and inequality? Is it true that greater integration has increased inequality around the world? Where does the nationalist sentiment that has spread in mature economies come from? Is it time to rethink the pace of global integration?

As Steven R. Weisman has eloquently argued, the striking opening and integration of the global economy in the past several decades have undeniably raised the living standards of many people around the world, especially those in the poorest countries. By the same token, it has placed new burdens on workers and companies in advanced economies, most notably its lower income citizens and the vulnerable middle class. In the United States alone, median household income has been practically stagnant for about three decades, the labor market continues to be anemic, manufacturing jobs have been lost, and many have experienced a significant deterioration in living standards. In Latin America, on the other hand, data from SEDLAC (CEDLAS and the World Bank) shows a steady decline in various measures of inequality between the early 1990s and 2014.

These findings are consistent with City University of New York Professor Branko Milanovic and his famous “elephant chart,” reproduced below.

Relative gain in real per capita income by global income level, 1988–2008

By analyzing increases in inflation-adjusted per capita income gains in relation to overall levels of income between 1988 and 2008, the author found that while the global middle class experienced a remarkable expansion (point A), the 20 percent richest people in the world saw income stagnation (point B), and the richest of rich became even richer (point C). The 20 percent richest people in the world consist largely of the lower middle class in rich countries. Hence, the chart reveals a stark if familiar pattern: During the most dramatic period of globalization, between the fall of the Berlin Wall and the eve of the global financial crisis, the middle class in mature economies was largely left behind in relative terms. The rich became richer; the poor, mostly in China, developing Asia, and Latin America, were able to climb into the middle class.

Contrary to conventional wisdom, globalization has not increased world inequality—in fact, it has contributed to greatly reduce it. However, a substantial part of the middle class in rich economies were made neither better nor worse off, but were witness to accelerated earnings gains in segments of their own country’s population, as well as to gains in incomes of poorer countries around the world, creating a dangerous sense of relative exclusion. It is this feeling of relative exclusion that today is manifested in movements like Brexit, the rise of Donald Trump in the United States, and the appeal of nationalist discourse in Europe. Manifestation is diffuse because the feeling of being deprived of globalization gains, of being left behind, causes different reactions in people—from the rescue of old traditions to xenophobia, from blind nationalism to the sense of a pressing need to regain national autonomy outside the perceived constraints of the European Union, in the case of Britain, or trade agreements in the case of the United States.

Is it time to rethink the pace of globalization? Should one accept the argument that globalization needs to be reversed? Appealing as they might seem, these are precisely the wrong questions to ask.

Globalization has been shown to reduce inequality, but to do so too unevenly. The challenge, therefore, is not to reverse it. Rather, it is to help buffet the highly unequal impact of global inequality reduction.