Globalisation and Austerity


Standard economic theory dating back to Adam Smith in the 18th century appears to hold that international trade is always a win-win for each country. Although some countries lose in some sectors, this is offset by gains in other sectors so that each country is, in theory, better off.

In practice, world trade has not necessarily worked in a way that benefits all countries. Like many economic theories, it is true to a point but is subject to significant limitations in practice. There has been a growing sense that globalisation is leaving more and more people behind and that this is having political consequences and kickback from those communities which are losing out.

The post-war balance of economics and social democracy in many Western countries seemed to break down in the late 1970s with high unemployment, high inflation, industrial relations chaos and urban decay. In response, the early 1980s in particular with the influence of Margaret Thatcher in the United Kingdom, Ronald Reagan in the United States and other centre and centre-right governments elsewhere, the state / government’s presence in the economy was rolled back.

As in an earlier period, the neoconservative economic philosophy put the free market back front and centre again and was the presumptive optimum position in most markets. Labour and union rights were reduced. Many state industries were privatised and subject to forms of competition.

The mid to late 80s coincided with the moves to complete the single market in the European Economic Community. With the collapse of communism in the former Soviet Union and Eastern Europe, Western free-market capitalism seemed to be confirmed to be the only game in town.

The late 1980s coincided with greater liberalisation in international trade. Exchange controls were lifted in many countries opening the doors to international free-moving capital. A key element of the European Single Market was the final lifting of capital controls between member states.

The mid-1990s saw the most significant ever liberalisation of international trade with the replacement of GATT by the World Trade Organisation with new much stronger dispute resolution mechanisms, further tariff reductions on most goods, new agreements on services and a significant enhancement of some of the basic rules to make them more effective

China commenced its meteoric rise in 1978, gradually abandoning core communist principles. China became a member of the WTO agreement in 2001 and had had access to most western markets on  WTO terms since the mid-1980s. China and later, y other lower-cost East Asian countries quickly moved up the value chain to produce more and more of the manufactured goods sold in Western countries.

Domestic manufacturing in those countries could not compete against Labour costs which were a fraction of those costs in more developed countries. Average wage rates in manufacturing in the United States did not grow at all after the early 1970s, leaving those groups far behind other sectors. Large parts of the United States and the UK manufacturing belt became wastelands. This was accompanied by higher and persistent unemployment, lower labour force participation and lower wages.

This contrasted markedly with the prosperity and enormous rise in real incomes, in particular for Americans after the Second World War up to the mid-1970s. The consequence was a marked increase in inequality between those whose skills were redundant or had become less valuable and others in new sectors who seem to prosper in inverse proportion.

International trade theory predicted that the losses would be offset by gains, but it was clear that the losses and gains were falling in a, increasingly unequal way. Those with traditional skills or in less skilled areas lost out to those in new high skilled areas particularly in services and intangibles. In particular, those with access to capital, social and monetary, gained disproportionately. The relative position has seemed to become increasingly unequal with the passage of time.

Multinationals have become an ever more predominant feature of international trade. They can readily outsource particular functions in low-wage economies while undertaking other functions and higher-skilled jobs in more developed economies.

There has been ample research to show both in the rejection of the European constitution in France the mid-2000 and indeed in the Irish rejections of the Lisbon Treaty that concerns about globalisation and wage competition from Eastern Europe played a significant factor in the “no” votes. Correspondingly “yes” voters were more likely to have third-level education and benefit from globalisation and open labour markets.

Brexit and the other populist governments in Europe with nationalist anti-immigration type stances, seem to be clear kickback against increasing globalisation and liberalisation. This pattern is also seen in the election of Donald Trump.

Immigration, in particular, Eastern European immigration throughout England and outside the Greater London area, is commonly described as the principal or predominant cause of the Brexit vote. The is clear evidence of a correlation between leave voting areas and “left behind” communities, the immediate threat of lower wages and higher rents from immigration, migration and globalisation. Immigration into areas in which it has not traditionally reached has seen increased pressure on health education and other government services.

Compounded by Austerity

The aftermath of the 2008 financial crisis saw the growth of enormous imbalances in public finances across the Western world. The crisis had led to an economic recession more severe than any seen since the Second World War. The result has been that the national debt in many countries, including the United Kingdom, had soared to levels that did not appear to be sustainable. Both the Labour Party and the Conservative party entered the 2010 election on programs of expenditure reduction.

The Conservative/ Liberal Democrat government of 2010 to 2015 introduced significant reductions in public expenditure at a time when growth remained low, and unemployment was rising. The period of retrenchment and austerity has continued for almost the entire decade although it seems set to be abandoned in the wake of Brexit.

The austerity measures lead to sharp reductions in welfare spending, cancellation of school building programs, severe reductions in local government funding, increased VAT and tax levels, the abolition of government bodies and reduced spending on public services. Central UK government funding of local government fell by 60% in the decade. Capital investment in many areas, including housing, was cut severely.Capital investment in many areas, including housing, was cut severely.

Public sector pay was either frozen or subject to minimum increases. Working age social security payments such as universal credit, child benefit, tax credits, working tax credits housing benefit and jobseeker’s allowance were limited to 1% increases rather than the conventional rate of inflation increases.

Benefits were reduced in the Welfare Reform Act 2012 setting a maximum on the amount of state welfare benefits that could be paid to a household in a given year. Housing benefit was significantly restricted. The under-occupancy penalty referred to as the bedroom tax reduced the incomes of over half a million social housing tenants in the United Kingdom.

Real wages fell by approximately 5 per cent between 2008 and 2015 according to an LSE Centre for economic performance study. This was the largest fall since the great depression.

There is s evidence that the effects of radical and prolonged austerity were a significant factor in the Brexit vote. The effects of austerity were more severely felt in regions which were already most disadvantaged by globalisation and changes in the economy.

Some have described Brexit as a vote of the masses against the elite. It has been observed in many polls not least those in Ireland that referenda are often used as a means of kicking back at the government for a variety of grievances. It can be seen as a call to action to governments who have ignored the interests of their electorate across a range of areas.