We may return to the global economy as it was in the inter-war period, except that there are no empires any longer. It is a dismal prospect
The debate about the UK remaining or quitting the EU was thought by most liberal, progressive people— not just in the UK, but around the world—as being about the economic costs and benefit of access to the Single Market, modified by the necessity of accepting all immigrants from within the EU. The results when they came surprised everyone, including the winners. The overall margin, with 34 million votes and 72% turnout, was just under 4 percentage points. Scotland and London voted to Remain. That distracted attention from the fact that England, with its 28 million votes, plumped overwhelmingly for Brexit by 7 percentage points. If anything, London and Scotland made the final outcome look more favourable to the losers than it was.
Nationalism is a good thing for the countries of the so-called Third World. But, in Europe, which went through horrible World Wars in the 20th century, it is a problem. France and Germany had fought three times between 1870 and 1945. So, after World War II, the countries of Europe embarked on a programme to overcome the disease of nationalism and pool their sovereignty together in the European Union. This was to guarantee permanent peace for a violent continent.
At the same time, the experience of protectionism and tariff wars during the Great Depression convinced the USA to take the lead in building a structure for international trade which would achieve as much liberal free trade as possible. At first, GATT, and then, the WTO delivered that structure. Here, countries were again persuaded that nationalist selfishness could be economically hurtful. Even the developing countries were convinced by the 1990s when the WTO accord was signed.
Now, in the US, the Trump phenomenon is based on the fear of free-trade. Donald Trump is arguing that the benefits of free-trade accrue disproportionately to China and other countries, not to the US. This mirrors the argument developing countries used against free-trade as they practised import-substitution industrialisation. India was at the forefront of that. The developing countries set up UNCTAD to argue the anti-liberalisation case.
In the current campaign in the US, the two candidates, Trump and Hillary Clinton, may very well converge on a platform of retreat from globalisation and liberal free-trade. The other Democrat contender who bowed out, Bernie Sanders, sang from the same hymn-sheet as Donald Trump. Clinton will be under great pressure to abandon the policies her husband championed and oppose the Trans-Pacific Partnership. The nationalist fear of foreign competition has now gripped the richest country in the world.
There is more than one way of understanding why this has happened. We had a boom cycle from 1945 to 1975, which made steady economic growth, mass consumerism and full employment familiar for the developed country as never before. Despite oil price rise and stagflation, the down cycle of 1975 to 1992 did not erode the faith in free-markets and free-trade. The next boom of 1995-2008 was
unprecedented as developing countries also joined the club of high-growth along with the rich countries. The collapse of that boom since then was thought quickly reversible at first. But now after eight years, it looks like low-growth may become a stubborn fact.
This despair is behind the rise of the new nationalism. In the good old days of the Keynesian Golden Age (1945-1975), ordinary manual workers in the rich countries could share in the fruits of growth. Steadily, since the end of that boom, they have been losing out. It was one thing when Black Americans were lagging behind the white. Now, everyone is in the same boat in the US. Deprivation is not news for the Black American. The brief rise of relative income in the 1995-2008 boom was. But white workers have now waited for too long to regain their prosperity.
In the meantime, productivity growth is slowing down, as Robert Gordon has argued in his massive book. Monetary expansion through QE has set off a bubble in asset prices, but not encouraged new investment. If innovations will come, they are bound to be labour-replacing, at least as far as manual labour is concerned.
Neither Trump nor Clinton has any intention of reversing this trend towards deglobalisation. Clinton may do it slower than Trump. But even that will depend on whether the Congress is still held by Republicans or Democrats. Trump will try, but may not get a Congress which will be pliable regardless of its political colour.
We are about to enter a fragmenting, stagnating world economy. There appears neither the prospect of imaginative leadership nor some revolutionary political change. The dismal prospect is of the US and the EU sliding into a protectionist quarrel. It may possibly destroy the EU. Brexit was just the first sign. We may return to the global economy as it was in the inter-war period, except that there are no empires any longer. It is a dismal prospect.
The author is a prominent economist and Labour peer