Lessons to be learnt from Brexit

The United Kingdom decided to leave the European Union on Friday, by a small but nonetheless profoundly significant margin. This result has left markets stunned—European and UK banking stocks, the FTSE and the pound all crashed on the news, and the ramifications of this decision are still unfolding. The UK political establishment seems completely bewildered—David Cameron’s confident demeanour apparently deeply shaken, he announced his imminent departure as prime minister moments after the results were confirmed. He clearly never expected this result when he took the (in retrospect, terribly rash) decision to call the referendum this early in his second term.

We can learn much from this decision. It serves as a wake-up call to pay attention to small, hitherto seemingly disconnected events which reveal the contours of a deep political problem at the heart of the global economy. The issue is the growing disconnect between the views of elites and the views of the broader population about the sweeping changes that globalization has wrought.

The very wealthiest value globalization for a few obvious reasons. First, labour costs are lower with the free movement of workers across borders, benefiting both wealthy households and the businesses that they own. And second, goods and services from far-flung parts of the world are more readily available for consumption at will.

If we redefine elitism by education rather than wealth (those at the top end of the education spectrum who might not necessarily be at the top end of the wealth distribution), globalization also delivers rich dividends for this group. For one, they have access to a larger and more remunerative global market for highly-skilled labour, leading to greater opportunities for enrichment both monetarily and in terms of knowledge creation and acquisition. Another important issue here is that freer mobility of capital across borders makes it easier for educational elites to get high-quality ideas funded—either by governments or private parties.

These benefits are not widespread, and what is less often considered by many is the large number of relative losers from globalization. It is easy to deride the opinions of those who support Brexit—Nigel Farage, Donald Trump or Bernie Sanders—but their perspectives matter. Indeed, they have been pivotal for voters in the Brexit decision. For every benefit outlined above that accrues to the wealthy and educated, there is a cou-ntervailing cost that the losers face.

For example, the free movement of workers across borders generate economic insecurity for incumbents. A British plumber is not likely to welcome the entry of an experienced Romanian plumber into the local labour market, as this clearly implies a one-way movement in his wages. Goods and services from far-flung areas may be more readily available to elites, but if this means that they drive up the prices of goods in limited supply (think housing stock in London), prices rise past the point of affordability for locals. A rising premium for skilled labour and increasing automation threatens unskilled workers, especially the elderly, as they grapple with the existential issue that they may become redundant in many senses of the word.

None of this is to say that globalization is a zero-sum game—there have been clear benefits of globalization for economic growth overall. Rather, it is the distributional consequences that have not been thought through carefully enough. Put differently, if we want a more flexible, borderless, creative world, we need to build systems to insure the losers from globalization from the inevitable consequences of such an environment, or they will vote with their feet.

In addition to these very real issues, there is a serious need for better communication to those disenfranchised by globalization. The “Remain” campaign, with the benefit of hindsight, overemphasized the (correctly forecast) gloomy scenarios arising from Brexit. Until the very last moment of the campaign, however, they did not make any attempt to outline the more intangible benefits arising from the vision of a globalized world. While one might argue that it is difficult to dream of Marie Antoinette’s cake when one is starving for lack of bread, it is ultimately the vision of a better future that leads us to make important decisions—and when well-articulated, such positive scenarios can be deeply compelling (“yes we can”).

In the short run, the United Kingdom will inevitably suffer a period of painful adjustment in the aftermath of Brexit. For its leaders, articulating a positive vision of globalization is now more important than ever. There are two paths possible now, one which leads to a more parochial future, and the other to a model of an open, global and inclusive society. It is critical that the latter path is taken, as that is the only road to a more prosperous future for all.

It is also worth sparing a thought for that deeply flawed, dysfunctional and wonderfully inspiring institution —the European Union. It is perhaps more relevant now than ever, with the most comprehensive implemented vision of human rights of any extant multilateral organization. Following Brexit, it will fight for its survival. Let us hope that the leaders of the remaining European Union member nations will successfully articulate this positive vision of globalization, and take the necessary steps to help globalization’s losers to feel its benefits more tangibly.

Tarun Ramadorai is professor of financial economics at the Saïd Business School, University of Oxford, and a member of the Oxford-Man Institute of Quantitative Finance.

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