With many advanced economies pushing back against a globalised world, it will become even harder to afford welfare states in the age of ageing.
By far the best lens through which to view the current anti-globalisation movement is Dani Rodrik’s Globalisation Trilemma. This is the powerful idea that national sovereignty, democratic politics and hyper-globalisation – by which he means deep economic integration – are essentially incompatible. You can have two of the above but not all three. As we have seen with the recent backlash against the EU in the UK, across the continent and increasingly in the United States, there is a growing thirst for national identity and control in the face of globalisation – most vividly expressed through the Brexit campaign slogan “let’s take back control”.
In trying to understand the Brexit vote and wider antipathy to globalisation, many have argued that it stems from those millions of people who have lost out as a result of international trade and labour flows. Globalisation has, according to this view, been good for those at the top of the income distribution, but not those in the middle or the bottom. But as recent work from the Resolution Foundation shows, after adjusting for global population growth, and excluding the ex-Soviet States and China from their analysis, the much discussed fall in per capita incomes for low and middle income households in developed countries disappears. The key conclusion is that while gains have flowed disproportionately to the richest within many countries the “incomes for the lower middle class of the rich Western world have grown, not stagnated”. In response, it could be argued that the disproportionate gains for the wealthiest represent a domestic policy failure to support the redistribution of wealth rather than it being simply a result of global forces.
Globalisation has undoubtedly created winners and losers, but perhaps the scale of those losses has been overstated and could have been further reduced via effective domestic policy to redistribute wealth. Moreover, it must be emphasised that increased trade, combined with growing working age populations, were critical drivers of bumper GDP growth in the 30 years prior to the 2008 financial crisis. Indeed, there is substantial theoretical and empirical evidence to show the effects of trade on growth are positive and highly significant. For these reasons, the current anti-globalisation tide seems to stem more from a thirst for sovereignty and identity within democratic countries rather than a cry for help amongst those who have lost out economically due to increased trade or migration – though clearly the latter is a prevalent concern for many.
But in voting to rescind globalisation and take back control, countries will reduce their long run economic potential. In tomorrow’s world, we will not be able to rely on two of the most dynamic forces behind the dramatic rise in post war prosperity – increased trade and rising working age populations. Yet in this new world, our populations are growing older every day, requiring more public expenditure to sustain and improve their wellbeing through pensions, health and care. Identity it seems may come with a significant economic and financial cost. Technological advances may of course exceed expectations and support long run growth and sustainability in the absence of rising trade and globalisation. Governments may be able to use domestic policy to support the growth of highly productive home-grown industries. But, ironically enough, without exposure to international competitive pressures and sharing critical knowledge across borders, the chances of achieving each will significantly diminish. Identity yes, but less opportunity.
The combination of ageing and creeping protectionism will exacerbate economic and financial challenges already facing economies the world over.
Head of Economics of Ageing