Populism may be the inevitable result of globalization
Too much of globalization may lead to populism, either left-wing or right-wing, depending on whether the majority is mobilized against the elites or some visible minority
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The rise of populism across the globe may be an inevitable result of relentless globalization, according to Harvard economist Dani Rodrik. In a recent National Bureau of Economic Research (NBER) working paper, Rodrik argues that “hyperglobalization” leads to increasing fissures in society as it picks winners and losers. Globalization drives wedges in society, sometimes between capital and labour, between skilled and unskilled labour, between regions, etc. When the majority starts to feel insecure due to continued globalization, its ire could either be directed against the elites or against minorities. The former leads to left-wing populism, as witnessed in Latin America, Spain and Greece, while the latter leads to right-wing populism as in France and many other European countries. According to Rodrik, policymakers need to rethink and perhaps ‘rebalance’ globalization to curb its excesses.
Read more: Populism and the Economics of Globalization
The foreign exchange market in late 2014 arguably predicted the Swiss National Bank’s (SNB’s) decision to abandon its “currency floor” in January 2015, according to a Bank for International Settlements (BIS) research paper authored by Michael Funke of Hamburg University and others. The “currency floor” was the commitment that the SNB gave to market participants in 2011 to buy unlimited quantities of euro at the rate of 1.20 Swiss francs (CHF). The SNB resorted to such a guarantee to prevent the Swiss franc from strengthening further as jittery investors were fleeing the euro and buying Swiss assets during the euro zone debt crisis. It was necessary to halt the franc’s rise to protect Swiss industry. The BIS paper, hence, argues that financial markets can sometimes provide clues to predict big events, just like the US bond market in 2007 had presciently hinted at an impending recession.
The government’s proposal to sell its stake in Air India has expectedly received a mixed response. Air India’s financials reveal that the national carrier is on the path to profitability, according to an article in the Economic and Political Weekly by R. Venkatesan and Pallavi Choudhuri, researchers with the National Council of Applied Economic Research, Delhi. They argue that the debt obligations of the carrier can be serviced, given its improving performance. Specifically, they note that contribution per passenger kilometre has been positive since 2012-13, i.e. revenue per passenger kilometre has exceeded costs. Hence, disinvestment at this juncture could be suboptimal and may not adequately compensate the taxpayer for bearing Air India’s burden in recent years.
Read more: Is Disinvestment of Air India Appropriate?
Existing approaches to measure illicit global flows through trade mis-invoicing need an overhaul, according to a recent paper by Suranjali Tandon and R. Kavita Rao, researchers with the National Institute of Public Finance and Policy, Delhi. Firms often over-invoice imports to show higher costs and evade taxes or to launder money abroad. Comparing trade data from different countries can provide some estimates of such mis-invoicing, as one country’s exports are necessarily another’s imports. However, the existing approach has generally assumed that developed countries report their numbers correctly while it is the developing countries which mis-invoice. Such an approach might be inappropriate, as trade mis-invoicing between developed countries is also substantial. The paper argues that it is better to use export mis-invoicing by all countries to estimate global illicit flows.
Read more: Trade Misinvoicing: What can we measure?
Capital inflows could create grounds for future crises, says a recent piece in VoxEu by Glenn Hoggarth, senior economist with the Bank of England (BoE), and others. While capital inflows increase a country’s financial resources, they could create ground for future crises if subsequent outflows are sudden and lumpy.
The BoE economists find that equity flows are more stable than debt flows; inflows from non-banks more stable than banks; and local currency-denominated debt more stable than foreign currency debt. They agree that macro-prudential policies can be useful in ensuring stabilization of inflows, effectively endorsing the practice of many developing country central banks, including India, which have often tried to manage inflows and outflows.
Economics Digest runs weekly, and features interesting reads from the world of economics.