In the shock after the Brexit referendum vote the risk of contagion was raised. Analysts asked which EU country might leave next and whether this unravelling could shatter the postwar European order.
A month later it’s clear that Brexit was less a cataclysmic cause than a symptom, a manifestation of global forces unleashed by the 2008 crisis including slower growth, rising inequality, and a widening backlash against open borders and incumbent leaders. Inside Europe the political earthquake is receding, with the installation of a new prime minister who, ostensibly, did not want to leave the EU. Yet, even if Brexit does not herald the unravelling of Europe or the global economy, it is the most important sign yet that the era of globalisation as we have known it is over. De-globalisation will be the new buzzword.
The world has entered what I call the AC era—after the crisis of 2008. It is already marked by much more upheaval than prevailed in era before the crisis, and many of the policies and leaders nations have embraced, hoping to ease the pain, are only making matters worse.
Worldwide, an anti-establishment revolt has been raging since the global financial crisis. In 30 of the major democracies, the incumbent has been winning in as few as a third of national elections each year since 2008, down from two thirds before that year. Among 20 top emerging and developed nations, the median approval rating of the incumbent leader has fallen from a high of 54 percent in the years before 2008 to just 37 percent.
Anger at incumbent governments is now widely seen as a boon to rightwing populists like Donald Trump, Marine Le Pen, and some of the leaders of the Brexit campaign. This, however, is a revolt against the establishment, not for an ideology, left or right.
In Europe and the US rightwing upstarts are exploiting the frustrations of the middle class by blaming their woes on immigrants stealing jobs. But there is no such widespread rise of the populist right in Asia or Latin America, where in voters have been toppling leftwing governments and putting in power mainstream reformers like Mauricio Macri of Argentina and Pedro Pablo Kucynski of Peru. The newcomers are not all radicals, and the ballot-box revolts are not isolated, local events. They spring from slow growth in the global economy which has fallen since 2008 from its postwar average of 3.5 percent to just above 2 percent, the level that feels like a global recession. This is the weakest recovery of the postwar era, and until recently Europe was the hardest-hit region, having suffered not one but two recessions since 2008. It has thus been fertile ground for popular anger.
That frustration is magnified by rising inequality. To fight the global slowdown, central banks have been pumping out easy money. Instead of fuelling wage and job growth in the real economy, as intended, much of that money has found its way into financial assets, including stocks, bonds and housing—pushing prices to record highs. Because the rich own most of these assets, inequality is widening and spreading, and wealth is massing in financial capitals like New York and London. The period since 2008 has seen weak wage growth for the middle class accompanied by spectacular returns for the wealthy: in Britain, wages are up 13 percent, but the stock market is up 115 percent.
This story repeats itself in country after country. In a recent study of 46 major economies, Credit Suisse found that before 2007, wealth inequality was on the rise in 12; after 2007, that number more than doubled to 35, from China and India to Italy and Britain. In that brief span, the worldwide population of billionaires nearly doubled to more than 1800.
More than 70 of them live in London, one of the highest concentrations in the world, making the British capital a ripe target for class resentments. In England proper the Brexit vote was, in large part, a vote of all against London, its globalised elite, and all they stand for, including free trade and open borders.
Here too, the British revolt is less a turning point than the latest flashpoint for the negative passions of the AC era. In late 2008 the group of 20 leading economies known as the G20 gathered at a summit and vowed not to engage in the kind of trade wars that extended the Great Depression. Then they went back home and have since imposed hundreds of new barriers to trade. This bout of protectionism has helped to slow growth in global trade from better than 8 percent before the crisis to near zero. Britain has turned inward too, imposing more than 200 new trade barriers after the global financial crisis, third most in the developed world after the United States and Germany, according to the Centre for Economic Policy Research.
The hype for globalisation that excited the era before the crash has given way to fears of deglobalisation and the measures governments have taken to buffer economies against another crisis have only deepened this self-destructive trend. Driven in part by new limits on their overseas activities, global banks have pulled back to within their home borders. Largely as a result, global capital flows fell from a peak of 16 percent of global GDP in 2007 to just 2 percent, a level last seen in the 1980s. This retreat inward will act as a drag on economic growth going forward, suggesting that every country needs to downsize its ambitions, or face new outbreaks of frustration.
The anti-immigrant movements are the latest proof, and they come at an inopportune time. In countries rich and poor, women are having fewer and fewer children, a trend that predates the crisis of 2008. Since 1980 the number of countries with a shrinking population of working age people has risen from 2 to 38. And one of the only ways for any country to counter the economic shock of depopulation is by attracting immigrants.
In fact Britain’s workforce would already be in decline, too, were it not for relatively strong net migration, which brought in 900,000 people over the last five years. Though the challenges of assimilating foreign workers are real, so are the economic consequences of barring them: fewer workers will mean less growth.
But perhaps this outcome is unavoidable now. In the decades before 2008, the world economy expanded at it fastest pace in recorded history, thanks in part to greater freedom of movement for goods, capital and people. Unfettered globalisation lifted millions of people out of poverty in the emerging world, but it also frayed the social fabric of many western nations. Brexit is just one manifestation of the anti-globalisation backlash in the post-2008 era. The champions of that backlash are pushing policies that are likely only to exacerbate the global economic slowdown.
But the message from Brexit and similar movements is clear: economic growth may have to take a back seat while political leaders work to address the anger of those who believe that globalisation has left them behind.
Ruchir Sharma is the author of The Rise and Fall of Nations. He is chief global strategist and head of emerging markets at Morgan Stanley Investment Management