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In 1919, John Maynard Keynes memorably looked back at the first era of globalization that had ended in the slaughter of World War I: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend."

Keynes could have been talking of our times. And, while there are thankfully no global war clouds on the horizon, the second era of globalization that began with the destruction of the Berlin Wall is now being called into question. The recent Brexit vote, the rise of maverick politicians in the rich countries and the collapse of global trade are just some of the disparate indications of how the globalization project is under pressure.

The backlash has gathered pace despite the fact that the past few decades have seen a rapid decline in global poverty, relative political stability and a reduction in global inequality.

The problem is that the past couple of decades have created losers as well—especially the middle class in the developed countries that has been hollowed out because of the shift of jobs to Asia, or what the economist Branko Milanovic has described as the greatest reshuffle of individual incomes since the Industrial Revolution. There is now a distinct tension between the spread of international opportunity on the one hand and the increase in national inequality on the other. Dani Rodrik has charted out a political trilemma, similar to the more well-known impossible trinity that central bankers face in an open economy. Rodrik says: “Democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full."

Globalization has undoubtedly benefited countries such as India, which began to integrate with other economies after nearly four decades of dirigisme socialism. The political challenge now is to figure out how to protect the gains from globalization while assuaging the pain of those who have been left behind. The response has to be at two levels. First, voters in any one country will quite naturally be more concerned about rising inequality within a political territory rather than the good news that global inequality has come down. Dealing with their concerns will require a domestic policy response. Second, multilateral institutions need to be strengthened if each country is not to slide into protectionism. The experience of the 1930s should never be forgotten. The system of fixed exchange rates under the gold standard essentially meant that nation-states had to respond to the Great Depression with high import barriers. Beggaring the neighbours proved to be a negative sum game.

There is a more immediate concern as well. The decline in global trade means that foreign demand is a much weaker source of economic growth. China has already begun to shift its economic model in favour of domestic demand, though this move precedes the current round of problems. The Narendra Modi government will have to figure out a strategic path for Indian industrial development in case global trade stagnates in the years ahead.

This is not a call for protectionism. Free trade is still the best bet for India, but the rapidly shifting global situation, from the economic changes in China to the political changes in Europe, will mean that the economic strategy of the future will have to be designed against a very different backdrop.

Has globalization suffered a setback? Tell us at views@livemint.com

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