The Brexit referendum unleashed a flurry of emotions and reactions, but several weeks after the vote some of the dust is finally beginning to settle. This seems like a good moment to step back and seek to draw some preliminary conclusions about the deeper trends behind the British people’s dramatic decision.
In probing the underlying causes, I am quickly taken back to one single chart. It is of course simplistic to attempt to understand a complex social phenomenon such as Brexit and the cross-cutting multi-issue coalition that delivered it through only one data point – yet I think the graph below at least points towards the root causes of the referendum result, why the EU and immigration became the lightning rods for popular discontent, and the lack of trust in ‘experts’. It also suggests Brexit is not an isolated case. Indeed, similar dynamics can be observed across all advanced democracies.
This famous graph by Branko Milanovic, one of the leading experts on global inequality, highlights income gains globally since 1988 and until the global financial crisis. The main takeaway is that the big winners of globalisation have been people to the left of point A (excluding the bottom 5%), who have seen their income significantly improve thanks to global flows. This group comprises particularly large swaths of Asia, but also parts of Latin America and Africa.
Now, the other big beneficiary has clearly been the top 5% or even 1%. However, the big losers have been the people at point B – typically the middle classes in advanced economies, who have seen their incomes stagnate for decades (and longer in the case of the US). Indeed, if you take China out of the graph, real growth turns flat-to-negative for people between the 70th and 90th percentile. Income growth was replaced by what former IMF chief economist Raghuram Rajan calls a ‘let them eat credit’ approach, yet this came to an abrupt end in 2008.
The graph suggests that the referendum result can be traced to problems facing all national liberal democracies under conditions of globalization rather than any particular issue with the EU or immigration. It is worth remembering the political origins of the referendum – namely, David Cameron’s inability to retain full control over his party in the run-up to the 2015 general election (following his extremely misguided pledge to get immigration down to ‘the tens of thousands’ during the 2010 campaign). Thus, the Conservative Party exported its own internal instability onto the issue of Europe.
This collapse of the representative function of politicians and the outsourcing of major decisions to an inadequate, one-off simple-majority mechanism (with winner-takes-all dynamics that lead to polarisation and division) is a trend across Europe. Facing the ‘globalisation trilemma’ – the argument that countries cannot have national sovereignty, hyper-globalisation and democracy; they can only ever choose two out of the three – and the impossibility of delivering public welfare for the middle classes in emerging democracies (point B on the graph), governments have increasingly turned to referendums to handle difficult trade-offs with their electorates.
Second, the graph suggests that although there are very real grievances underlying the Brexit vote, they have little to do with the EU or even immigration per se. It is not hard to comprehend why somebody who has not benefited for almost three decades from the ‘tide that lifts all boats’ or from the ‘trickle-down economics’ of globalisation – particularly in the formerly industrial areas of Northern England – would turn against ‘the system’.
If anything, the collapse of ‘let them eat credit’ and the imposition of austerity across the board to pay for the benefits enjoyed (mostly) by the few at the upper end of the distribution spectrum provided the spark to ignite the lingering discontent. This perhaps indicates why studies of the generally positive or neutral impact of immigrants on welfare provision and taxes, and even the simple statistics about fraud or number of migrants (both massively overestimated by the public), failed to actually change people’s minds.
As for the EU, it was sold in the 1990s and onwards as a project chiefly to manage globalisation and put a human face on it. It now looks like the institution has failed to deliver on this promise, further fueling discontent. Interestingly, the privileged position of the UK within the EU – including its euro and Schengen opt-outs and its substantial rebate – hardly suggests that membership was constraining the country’s choices nearly as much as it binds those of Southern European governments.
This brings me to a third and central point – the general distrust of experts. As Michael Gove now infamously said on the eve of the vote, “the people of this country have had enough of experts”. He was proved right.
The general notion among efficiency-oriented economists is that the size of the pie matters more than the distribution. This notion is defensible on the grounds that as long as the economic ‘pie’ keeps growing, any particular groups that lose out can be compensated through the gains from expansion, and everyone will be better off. However, this notion encounters two problems today.
First, there is a mounting body of evidence that the distribution of wealth itself has an effect on the growth of the ‘pie’, even if causal mechanisms are still debated. This suggests governments should take into account the large number of of policy proposals being put forward to reduce inequality within nations.
Second, political scientists have cast doubt on the notion that compensatory mechanisms actually work very well. Whereas such compensation is clearly possible, there are significant political and commitment problems in convincing the ex-post winners of globalisation to share the ‘pie’ with the ex-post losers, regardless what promises might have been made ex-ante. This highlights one area where the EU is clearly at fault – while it has been successful in accelerating integration it has largely failed to provide compensatory mechanisms. One can even argue that EU rules on fiscal deficits and support for austerity measures hurt disproportionately precisely the losers of globalisation.
What is to be done in the face of these challenges? Globalisation has been mostly a success story, at least in the trade realm, for many emerging and developing countries (between the 10th and 70th percentile of the graph above). It has also been beneficial for advanced countries, although gains have been disproportionally concentrated at the top (95th percentile and above).
It is worth remembering that many advanced governments have historically increased their size in an attempt to provide a safety net for citizens suffering from the negative consequences of openness. Currently, with historically low interest rates, there is a strong case for sustained public investment in many advanced countries, including Britain.
Globalisation is at a critical juncture – since the financial crisis, for example, trade has been growing at significantly below its historical rate – and could go in two directions. One is towards a globalisation that serves the interests of both people in emerging countries and the majority of people in advanced economies, which would require some rules of the road and wise use of international structures for cooperation, such as the EU. The second is a repeat of the period in the early 20th century that heralded the end of the “first globalisation” and a retreat into nationalism and isolation. I hope that the outcome will be the former, but fear Brexit indicates how easily we could end up with the latter.
Ivo Iaydjiev is a former adviser to the Bulgarian government. He is currently a DPhil student at the Blavatnik School of Government at the University of Oxford, examining the impact of the global financial crisis on financial sector development in emerging markets.
