Financial globalisation - or ultra globalisation - has done more harm than good to the majority of economies, say Anshuman Gupta & Karunakar Jha.
After Brexit and Donald Trump winning in the US, it looked as if in many countries of Europe, ultra-right parties would gain prominence. However, after the way Emmanuel Macron won the presidential election in France after beating ultra-right candidate Marine Le Pen with a big margin, it seems the time for ultra-right parties is over.
What explains the steep rise of the ultra-right position and its equally fast slide? Are the people of Europe disillusioned with the populist policy initiatives of Trump? Or have they realised that protectionist or anti-Europe policies are not viable?
There was a steep rise in identity politics after 2008, a year of great recession. Many ultra-right parties sprang up riding on anti-globalisation and anti-migration sentiments.
Though globalisation - being a positive-sum game - helped all the parties involved at the aggregate level, some sections were left behind because of faulty implementation of globalisation.
In trade, proper attention was not given to government intervention for those left behind while doors were opened up for trade. To have a smooth transition from a closed to an open economy for trade, a flexible labour market and a vibrant financial market with effective insolvency laws are required.
Along with it, government intervention in the form of retraining the labour force released from import-competing industries is a must for equitable distribution of the fruits of opening up.
Western countries had the first two prerequisites - flexible labour laws and a deep financial sector - along with effective insolvency laws. However, government intervention to help those who were left behind has not been very effective.
The proof lies in the increasing inequality in the US and European countries. The income of the lower- and middle-middle classes have either stagnated in real terms or declined.
Again, financial globalisation - or ultra globalisation - has done more harm than good to the majority of economies. It has led to many economic crises. The South-east Asian crisis and the recent subprime crisis are two major crises in a little over a decade.
For the last two decades, it has been the dominant philosophy of international institutions to prod all countries for financial globalisation. The crises that followed have caused disproportionate pains to all sections of affected societies.
Mostly, the rich were bailed out and the lower and the middle-middle classes endured the maximum brunt. This part of globalisation has mostly had negative impact on vulnerable sections.
The negative impact of faulty globalisation was more profound at the time of deep recession, which the US and European countries have been witnessing since 2008.
The weaker sections of society suffered more. When the economic pie is dwindling, the trickle-down effect or safety nets of the government become weaker. It becomes the breeding ground for ultra-right parties, which exploit the prevailing emotion among the masses. They attempt to grab power by appealing mostly to the left-behind masses.
The second question is, what are the reasons for the sharp decline in popularity of ultra-right parties? A professor at a European university confided that while initially the ultra-right philosophy based on identity politics of protectionism and anti-immigration caught the fancy of a major chunk of the masses, people of Europe are already disillusioned with the Trump administration.
Proposed policies like banning immigration from seven Muslim countries (which was turned down by US courts), US’ effort to distance itself from the Nato on equal sharing of expenditure by allied countries, the proposed wall on the border with Mexico, renegotiating Nafta rules, scrapping the Trans-Pacific Partnership Agreement, Trump’s plan to correct trade deficit with China and Germany, not acknowledging climate change is a serious problem etc were viewed by most as irrational and unviable options.
The same protectionist policies were followed after the Great Depression of the 1930s. Before 1930, the world was highly globalised both on trade as well as on the finance front.
However, mercantilist policies are beneficial as long as other countries are following liberal ones. It is not possible in case of international trade.
The moment a partner country feels the pinch of protectionism initiated by the other country, it is likely to retaliate in the same manner, which would further deepen the recession.
The new generation in Europe is educated enough and well-versed with economic history. They do not want to repeat the same mistakes and eat away at the world economic pie. Let’s hope other countries of Europe vote for Europe.
Anshuman Gupta is professor; Karunakar Jha is professor and associate dean, University of Petroleum and Energy Studies, Dehradun.
Photograph: Lucas Jackson/Reuters