Abheek Barua and Bidisha Ganguly: Globalisation vs protectionism

Globalisation with small government has not been a successful pairing. Threat to job security and plummeting labour incomes have fuelled protectionism

The UK might not have faced the dire consequences that analysts had predicted in the aftermath of Brexit and if pre-election polls in the US are indeed accurate, Donald Trump might not become the next POTUS. The UK’s decision to leave the European Union (EU) in the June vote this year and the unexpected popularity of Trump’s protectionist (among other things) rhetoric have reignited the debate over globalisation versus protectionism.

While conventional wisdom is that free flow of goods, labour and capital across borders increases welfare, there is now increasing focus on how that increase in welfare is shared. Clearly, there are winners and losers in the process of globalisation and there is growing acceptance within the economist community that gains accrue unevenly and some redistribution of gains is imperative to make globalisation acceptable.

Of course, there are many commentators and analysts in the free trade camp who still perceive those who voted for Brexit as protectionist and xenophobic with irrational fears about free trade and immigration. Others are taking a hard look at the demographic that voted to leave the EU and examining whether those who voted to leave were the losers specifically from the UK’s integration with the EU and the free flow of goods and labour it entailed. Available data suggests that the supporters of Brexit were overwhelmingly older workers who did not go to university. They voted as they did on the basis of threat to their job security (and indeed job losses) that they feared would intensify if ties with the continent grew stronger.

In a book called The Globalization Paradox, economist Dani Rodrik argues that globalisation has been successful only in countries that have big governments with extensive regulation and wide social safety nets. Open markets and big governments are complements not substitutes, he asserts. In the UK, the government has in fact been retreating from the provision of services such as public housing, making voters even more insecure about their future. Globalisation with small government has not been a successful pairing.

The tunnel vision of the majority of analysts makes them assume that globalisation is an irreversible process. However, the lessons of history teach us otherwise: There have been periods of openness followed by a backlash when barriers to trade have had to be erected. The period of the Great Depression in the 1930s was one such period that came after the opening up of the New World in the late 19th century.

Kevin O’Rourke, professor of economic history at University of Oxford, draws an interesting parallel between 19th century European landowners newly exposed to competition with elastic supplies of land in the New World and late 20th century unskilled workers in developed countries exposed to competition with elastic supplies of cheap Asian labour. Rodrik argues that at the current juncture, policymakers should focus on distributing the gains from global integration rather than pushing it further.

Increased globalisation has resulted in a decline in labour’s share of income and a concomitant increase in the share of corporate profits. US data shows that labour’s share of income has been falling steadily from a high of 57.7 per cent of gross domestic product in 2001 to hit a 60-year low of 52.5 per cent in the first quarter of 2012. While some of this can be attributed to cyclical weakness in the labour market, long-term structural factors related to globalisation have surely had an effect in depressing labour income.

In the US, data presented by Avinash Persaud, emeritus professor of Gresham College, shows that average hourly wages have not risen versus inflation since the 1970s, and within that average, 70 per cent have seen a fall. In low-skill sectors, British firms have been able to introduce “zero-hour” contracts in which they are not obligated to offer any hours of paid work but employees must be always available. Unless policymakers make a conscious effort to reverse these trends, the political atmosphere will turn increasingly protectionist.
Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is chief economist, CII