The real message from Brexit
[Editors Note: Dennis de Tray is an external expert at Results for Development (R4D), with expertise in institution and capacity building in fragile states and development assistance delivered through non-ODA (official development assistance) channels. Past projects with R4D include working with the governments of Kazakhstan and Timor-Leste on strategic planning. Mr. de Tray’s views are his own and do not represent the views of R4D.]
By Dennis de Tray
The British vote to leave the European Union (also known as Brexit) is much more than an economic crisis or a U.K. crisis. Since World War II, peace and stability in the Western world have been supported by three pillars: democracy, globalization and free markets. Brexit has weakened if not broken all three legs.
Populism, driven by a sense of not sharing in global or national advances, is fueling a rejection of these long-accepted policies and ideas and a questioning of “elite” leadership in lieu of isolationism, especially on issues of trade and immigration.
One of the clear driving forces is a sense that globalization is a zero sum game—if China wins, the U.S. loses. All of the statistics and studies in the world will not convince an auto worker who has just lost his job due to overseas competition that globalization is a good idea. Even if the average citizen is generally better off than in the past, he or she may still feel like a “loser” since the top 1 percent are 10 times better off.
Unemployment and a shrinking middle class are serious problems, but populist solutions will not solve them.
Free markets have undeniably made the world a richer, better place, but they have also created losers and winners. Therefore, we must address the issue of unequal wealth distribution. The conventional solution is that the winners should compensate the losers—but how? We know what doesn’t work: communism. Socialism has worked in some small homogeneous countries with closed borders, but it does not work in large diverse countries.
The effect on global welfare will be huge if countries pursue isolationist policies—as the U.K. will soon learn.
So what’s the answer, or answers?
The best and the brightest among today’s leading economists need to come up with answers to two key questions:
- How much of the current distribution of national and global wealth is due to unlevel playing fields that are policy-based?
- What are the least-distorting policies to rectify the situation—to rebuild confidence in both globalization and free markets?
I would argue that the world has a choice—either redistribute wealth and income directly, or help the people who are falling behind become more productive so they can earn more. Both will take more public money—higher taxes. However, this must be done in a way that doesn’t undermine the incentives for highly productive (rich) people to innovate and create.
