By Gianmarco Ottaviano, Professor of Economics, Bocconi University. Originally published at VoxEU
Economic geography strikes back. After a couple of decades of easy talk about the ‘death of distance’ in the age of globalisation, the promise of a world of rising living standards for all is increasingly challenged by the resilience of regional disparities within countries. As long as many people and firms are not geographically mobile – and those who are tend to be the most skilled and productive – easier distant interactions can actually strengthen rather than weaken agglomeration economies. Recent electoral trends in Europe can be understood to a surprisingly large extent from this angle.
Econometric analysis reveals that the Leave vote in the British referendum on EU membership can be explained to a remarkable extent as a vote against globalisation much more than immigration, in particular against the perceived unfair distribution of the associated costs and benefits (Colantone and Stanig 2018a). In Ottaviano (2019) I discuss how Brexit and other recent electoral trends in Europe can be understood through the lenses of the lack of regional convergence.
The vote for Brexit was a protest vote by those who think they have experienced only the negative effects of globalisation: foreign competition, factory closures, persistent unemployment, stagnating purchasing power, deteriorating infrastructures and public services, rising social exclusion, brain drain, dwindling local tradition and identity, and growing uncertainty about the future. It is revealing that the Leave vote gathered more support among people who feel they have limited outside options: low-skill workers, as they are less employable both locally and elsewhere, and older people, as time is not on their side in the search for alternatives.
Even more revealing is that such a vote has a relevant ‘sociotropic’ dimension: people resent negative outcomes not only when individually hit but also when their local community is harmed. In this respect, the Leave vote was a request for ‘protection’ by those who think that others (i.e. the so-called elites in London and Brussels) have hijacked the right to make decisions in the common interest, which on paper should be good for everybody but ends up being good only for those who make the decisions. From this lack of redistribution of the gains and losses from globalisation rises the demand for protection that explains a large part of recent electoral outcomes in the UK and the rest of Europe (Colantone and Stanig 2018a).
European Integration and New Economic Geography (at Last)
Brexit will likely have a cost – sizable for the UK and more limited for the other member countries except Ireland (Dhingra et al. 2017). The reason is that the Single Market is beneficial to the average citizen of each member state. This was one of the reasons behind its creation. The European project of integration was born from the post-war belief that, as peace peddles prosperity, free trade can promote peace and thus activate a virtuous circle of peace and prosperity.
While the debate on the positive role of international trade for peace, in general, is still open, that European integration led to an unprecedentedly long period of peace in the Old Continent is a matter of fact. Some of the current members did experience war before joining the EU, but there have been no conflicts between any EU countries once they have become members.
Unfortunately, growing regional disparities within countries accompanied by dwindling redistribution of gains and losses are reinforcing the public impression that the virtuous cycle of peace and prosperity is not there for everybody to enjoy, but that it actually works selectively for areas that were already skilled and productive to start with. That European integration could have this unexpected outcome was a point raised by the so-called new economic geography in the late 1980s and early 1990s of the last century (Fujita et al. 1999, Baldwin et al. 2003), originally associated with Nobel Prize-worthy work by Krugman (1991).
At the time, the process that eventually led to the creation of the Single Market and the introduction of a common currency was predominantly informed by the traditional neoclassical paradigm of perfectly competitive markets and constant-returns-to-scale technologies. It typically predicted that, following economic integration, market forces would naturally lead to economic convergence in living standards across European regions.
Krugman’s point was instead that firms’ market power and increasing returns to scale in production are more realistic features of the modern world, and these could lead to the opposite outcome of integration causing divergence between flourishing ‘core’ regions and fading ‘periphery’ regions. However, new economic geography was thick in theory and thin in empirics, so its message got lost as European integration deepened without major traumas.
Things started to change dramatically with the Global Crisis as evidence started mounting about globalisation’s two offspring. Globally, due to offshoring and technology transfer, manufacturing and GDP shares have shifted from the G7 to a few developing countries (first of all China); this is the ‘Great Convergence’ (Baldwin 2016). Locally, due to skill-biased technological change and skill-biased globalisation, the economic geography of G7 countries has become more polarised between outward-looking dynamic growth centres and inward-looking stagnating backwaters; this is the ‘Great Divergence’ (Moretti 2012). Krugman might have been right after all.
The ‘China Syndrome’ and the ‘East Wind’
In Western Europe, the growing electoral disappointment with the European dream has indeed a strong geographical dimension, and the trend is more pronounced in local economies that have suffered more from two parallel developments (Colantone and Stanig 2018a,b): the ‘China syndrome’ (Autor et al. 2013), due to the competition shock associated with the rise of China and other low-wage emerging economies as global players; and the ‘East wind’ associated with the accession of low-wage Eastern European countries to the EU.
The more a local economy has been negatively affected by the two shocks, the more its electors have shifted towards the radical right and its policy packages. These packages typically combine the retrenchment against international openness and the liberalisation of the internal market and more convincingly address the demand for protection by an electorate that, after the austerity following the Crisis, no longer trusts alternatives based on more liberal stances on foreign relations and the parallel promise of a stronger welfare state.
A big reason why liberal democracies in Europe have remained relatively stable since WWII is that most Europeans have had hope that their lives will improve. A big reason why the radical vote has recently been on the rise in several European countries is that part of the electorate has lost this hope. People are increasingly worried that not only their own lives but also the lives of their children will not improve and that the playing field is not level.
On the one hand, despite some progress in curtailing ‘tax havens’ in recent years, there has never been as much wealth in tax havens as there is today (Zucman 2015). This is seen as unfair because, if public goods and services (including those required to help the transition to a ‘green economy’) have to be provided in the regions where such hidden wealth comes from, lost tax revenues have to be compensated for by higher taxes on law-abiding households.
On the other hand, fairness is also undermined by dwindling social mobility. In the last decades, social mobility has slowed down across large parts of the industrialised world (OECD 2018), both within and between generations. Social mobility varies greatly across regions within countries, correlates positively with economic activity, education, and social capital, and negatively with inequality (Güell at al. 2018). Renewed migration from the South to the North of Europe after the Crisis (Van Mol and de Valk 2016) is a testimony of the widening relative lack of opportunities in the places that have suffered the most from competition from low-wage countries.
Concluding Remarks
Globalisation has come accompanied by the Great Convergence between countries around the world but also the Great Divergence between regions within several industrialised countries. The same holds within the EU. In recent years, redistributive policies have had only a very limited impact in terms of reversing growing regional inequality. As a result, the traditional liberal package of external liberalisation and internal redistribution has lost its appeal with the electorate, conceding ground to the alternative package of the radical right that consists of external protectionism and internal liberalisation. This is both inefficient and unlikely to lead to more regional convergence. What the political and policy debate in Europe is arguably missing is a clearer focus on two of the main underlying causes of peoples’ growing distrust in national and international institutions: fiscal fairness and social mobility.
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Yet there is some social mobility but goes typically downwards.
Arrgh I want to like this article. I really do, but economists never really get it right, do they?
“the growing electoral disappointment with the European dream has indeed a strong geographical dimension”
Yeah blame Brexiteers… but last globe I looked at, Ireland was chock up against England but Poland was way, way far away. Yet Poland has not exactly moved leftward.
https://www.abc.net.au/news/2018-02-19/why-you-should-care-about-what-is-happening-in-poland/9460332
I’m just saying there is a much broader world than the economic profession seems to see. I don’t really blame them, but I think they’ve taken a lot of wrong lessons from 20th century America.
Economic journalism, in the desire perhaps to simplify its story, has a tendency to rely too much on moral causality, attributing performance or achievement less to policy and structure than to vague virtues, such as “skills”. The rich get richer is an easy narrative, sugar-coated in this instance with a vague gesture toward “already skilled and productive”.
It is too easy to imagine that virtue is rewarded and that increased income flows to those becoming vastly more productive, but in economics, paradoxes often rule and virtue is not necessarily rewarded.
Globalization has made it possible to reap huge rewards from financialization and constructing vertically deep and geographically broad supply chains. Organizing the making of cheap but reasonably well-made, fashion forward sweaters for Benetton can make millions for the financial entrepreneur, and make young shoppers momentarily happy; it may make locally substantial sums for a middle-man in Bangladesh, but very little for his sweat-shop workers, and it may not deliver much for the contracted clothing designer in Milan or Bangkok either. These phenomena are directly contradictory to Krugman’s vision from the 1980s of local concentration of network economies, economies of scale and experience and so on from the emergence, say, of a Hollywood or a Detroit (in the 1910’s and 1920’s) with huge gains from local concentration of “skills”.
We really ought to be more critical than this article is, in our assessment of how surplus is generated from productivity gains and then spread around. That upward economic mobility has slowed ought to give a clue that the exercise of political power from the top down has something to do with it.
When did this traditional liberal package mentioned in the concluding remarks ever happen?
Maybe if it was clear who got it, what it was, when it was done, how it happened then people might find this liberal package appealing.
Right. It would be better to say “the traditional New Deal liberal package…” has not lost its appeal, it was killed off bit by bit starting with NAFTA. From a 2016 Thomas Frank essay in Salon:
That appeal to [educated credentialed] class unity gives a hint of what Clintonism was all about. To owners and shareholders, who would see labor costs go down as they took advantage of unorganized Mexican labor and lax Mexican environmental enforcement, NAFTA held fantastic promise. To American workers, it threatened to send their power, and hence their wages, straight down the chute. To the mass of the professional-managerial class, people who weren’t directly threatened by the treaty, holding an opinion on NAFTA was a matter of deferring to the correct experts—economists in this case, 283 of whom had signed a statement declaring the treaty “will be a net positive for the United States, both in terms of employment creation and overall economic growth.”
The predictions of people who opposed the agreement turned out to be far closer to what eventually came to pass than did the rosy scenarios of those 283 economists and the victorious President Clinton. NAFTA was supposed to encourage U.S. exports to Mexico; the opposite is what happened, and in a huge way. NAFTA was supposed to increase employment in the U.S.; a study from 2010 counts almost 700,000 jobs lost in America thanks to the treaty. And, as feared, the agreement gave one class in America enormous leverage over the other: employers now routinely threaten to move their operations to Mexico if their workers organize. A surprisingly large number of them—far more than in the pre-NAFTA days—have actually made good on the threat.
…
Twenty years later, the broader class divide over the subject persists as well. According to a 2014 survey of attitudes toward NAFTA after two decades, public opinion remains split. But among people with professional degrees—which is to say, the liberal class—the positive view remains the default. Knowing that free-trade treaties are always for the best—even when they empirically are not—seems to have become for the well-graduated a badge of belonging.
https://www.salon.com/2016/03/14/bill_clintons_odious_presidency_thomas_frank_on_the_real_history_of_the_90s/
The only internal redistribution that’s happened in the past 25 – 30 yearsis from the bottom 80% to the top 10% and especially to the top 1/10th of 1 %.
Not hard to imagine why the current internal redistribution model has lost its appeal with the electorate.
UK policymakers had a great plan for globalisation.
Everyone needs to specialise in something and we will specialise in finance based in London.
That was it.
I think there are two different globalizations that people are responding to.
1. Their jobs go away to somewhere in the globe that has lower wages, lower labor protections, and lower environmental protections. So their community largely stays the same but with dwindling job prospects and people slowly moving away.
2. The world comes to their community where they see immigrants (legal, illegal, refugees) coming in and are willing to work harder for less, as well as having different appearance, languages, religion, and customs. North America has always had this as we are built on immigration. Europe is much more focused on terroire. If somebody or something has only been there for a century, they are new.
If you combine both in a community, you have lit a stick of dynamite as the locals feel trapped with no way out. Then you get Brexit and Trump. In the US, many jobs were sent overseas and so new people coming in are viewed as competitors and agents of change instead of just new hired help. The same happened in Britain. In mainland Europe with less inequality and more job protection, it is more of just being overwhelmed by the sheer quantity of newcomers in a society that does not prize that at all.
I saw the warning signs when Golden Dawn appeared in Greece
The liberals said it was just a one off, as they always do, until it isn’t.
How did successful Germany turn into a country where extremism would flourish?
The Hartz IV reforms created the economic hardship that causes extremism to flourish.
“Germany is turning to soft nationalism. People on low incomes are voting against authority because the consensus on equality and justice has broken down. It is the same pattern across Europe,” said Ashoka Mody, a former bail-out chief for the International Monetary Fund in Europe.
Mr Mody said the bottom half of German society has not seen any increase in real incomes in a generation. The Hartz IV reforms in 2003 and 2004 made it easier to fire workers, leading to wage compression as companies threatened to move plants to Eastern Europe.
The reforms pushed seven million people into part-time ‘mini-jobs’ paying €450 (£399) a month. It lead to corrosive “pauperisation”. This remains the case even though the economy is humming and surging exports have pushed the current account surplus to 8.5pc of GDP.”
This is a successful European country, imagine what the others look like.
“British referendum on EU membership can be explained to a remarkable extent as a vote against globalisation much more than immigration…”
As an FYI to the author… immigration is just the flip side of the same coin. Why were immigrants migrating? Often it’s because they can no longer make a living where they left. Why? Often globalization impacts.
Another recap about that really just mourns the lack of trust in the establishment, with no answers. More “I can’t believe people are sick to death of experts of dubious skills but networking…”
What it is just admitted that a system that can only work great for 20% of any given population if they are born in the right region with the right last name just sldoes not work except as an excercise in extraction?
And about the EU…as if it could never be taken over by bigger authoritatians than the ones already populating it.
Then see how much those who think it is some forever bastion of liberalism over sovereignity likes it….
“Another recap about that really just mourns the lack of trust in the establishment, with no answers. “
Usually it involves replacing the establishment or creating an internal threat to reinstate compliance in the establish (Strauss and Howe).
Strategies for initiate the former may be impossible in this era where the deep state can read your thoughts through digital media so you would like it would trend to the latter.
Mmmmm, yes, migration, globalisation and such like.
But, unregulated migration into an established environment, say a country, say, UK, on one hand furthers profits to those benefiting from low labour wages (mainly, friends of people working for governments), but on the other leads to creation of parallel societies, where the incoming population brings along the society they strived to escape from. The Don calls these sh***hole societies. Why bring the f***ing thing here, why not leave it where you escaped from.
But the real betrayal of the native population happens when all those unregulated migrants are afforded immediate right to social security, full access to NHS and other aspects of state support, services that they have not paid one penny in support before accessing that particular government funded trough. And then the parasitic growth of their “family and extended family” comes along under the banner of “human rights”.
This is the damnation of the whole of Western Civilisation which had been hollowed out from within by the most devious layer of parasitic growth, the government apparatus. The people we pay for under the auspices that they are doing some work for us, are enforcing things that treat the income generators, the tax paying society as serfs whose primary function in life is to support the parasites (immigrants) and parasite enablers (government).
The laws of biology and physics and whatever else say that the host that is being parasitised upon, cannot support the endless growth of the parasites attached upon it. The unfortunate host will eventually die.
Understanding of this concept is most certainly within mental capabilities of all those employed as the “governing classes “ that we are paying for through our taxes.
Until such time when legislation is enacted that each and every individual member of “government classes “ is made to pay, on an indemnity basis, through financial damages, forced labour, organs stripping or custodial penalties, for every penny (or cent, sorry, yanks), of damage they inflict on us taxpayers, we are all just barking.
This piece does an admirable job conflating globalisation and the ills caused by the neoliberal capture of social democratic parties/leaders. Did people just happen to lose hope, or were they actively betrayed? We are left to guess.
Note that these ills could also be laid at the feet of the austerity movement, and the elimination/privatisation of National Industrial Policy, both cornerstones of the neoliberal infestation.
Not only is globalization not new, all of the issues that come with it are old news.
All of it.
Part of the problem is that the global economic order is still in service to the same old same old. They have to rebrand every so often to keep the comfortable even more comfortable. Those tasked with keeping the comfortable more comfortable have to present this crap as “new ideas” for their own careerism or actually do not realize they haven’t espoused a new idea in 500 years.
Putin’s recent interview with Financial Times editor offers a clear-eyed perspective on our changing global structure:
“What is happening in the West? What is the reason for the Trump phenomenon, as you said, in the US? What is happening in Europe as well? The ruling elites have broken away from the people. The obvious problem is the gap between the interests of the elites and the overwhelming majority of the people.
Of course, we must always bear this in mind. One of the things we must do in Russia is never to forget that the purpose of the operation and existence of any government is to create a stable, normal, safe and predictable life for the people and to work towards a better future.
You know, it seems to me that purely liberal or purely traditional ideas have never existed. Probably, they did once exist in the history of humankind, but everything very quickly ends in a deadlock if there is no diversity. Everything starts to become extreme one way or another.
Various ideas and various opinions should have a chance to exist and manifest themselves, but at the same time interests of the general public, those millions of people and their lives, should never be forgotten. This is something that should not be overlooked.
Then, it seems to me, we would be able to avoid major political upheavals and troubles. This applies to the liberal idea as well. It does not mean (I think, this is ceasing to be a dominating factor) that it must be immediately destroyed. This point of view, this position should also be treated with respect.
They cannot simply dictate anything to anyone just like they have been attempting to do over the recent decades. Diktat can be seen everywhere: both in the media and in real life. It is deemed unbecoming even to mention some topics. But why?
For this reason, I am not a fan of quickly shutting, tying, closing, disbanding everything, arresting everybody or dispersing everybody. Of course, not. The liberal idea cannot be destroyed either; it has the right to exist and it should even be supported in some things. But you should not think that it has the right to be the absolute dominating factor. That is the point. Please.” ~ Vladmir Putin
https://www.ft.com/content/878d2344-98f0-11e9-9573-ee5cbb98ed36
He’s talking about the end of neoliberalism, the economic fascism that has gripped the world for over 40 years:
“If you’re not willing to kill everybody who has a different idea than yourself, you cannot have Frederick Hayek’s free market. You cannot have Alan Greenspan or the Chicago School, you cannot have the economic freedom that is freedom for the rentiers and the FIRE (finance, insurance, real estate) sector to reduce the rest of the economy to serfdom.” ~ Michael Hudson
Let’s get back to using fiscal policy for public purpose again, to granting nations their right to self-determination and stopping the latest desperate neoliberal attempt to change international norms by installing fascist dictators (while pretending they are different) in order to move the world backwards to a time when “efforts to institutionalize standards of human and civil rights were seen as impingements on sovereignty, back to the days when no one gave a second thought to oppressed peoples.”
http://tothepointanalyses.com/making-progressives-the-enemy/?fbclid=IwAR0ebXAngJpSZY0-WdB-zOgfqWnGsmYzqkYMP4A69kqbHrTI6WqjSpWM4Ow
Very interesting article, and even more interesting conversation! There is a type of argument that very accurately points out some ills that need addressing, and then goes on to spout venom on the only system that might be able to address those ills. It may be that the governing classes are making life easy for themselves. How to address that is the hard and difficult issue. Most of the protection of the small people comes from government. Healthcare, schools, roads, water etc.(I’m in scandinavia). If the government crumbles, the small people have to leave. The most dreadful tyranny is better than a failed state with warring factions. The only viable way forward is to somehow improve the system while it is (still) running. But this discussion I do not see anywhere. If the discussion does not happen, there will not be any suggstions for improvement, so everything stays the same. Change is inevitable – it what state it will catch us is the important thing. A cashier at a Catalonian family vineyard told me the future is local and global: the next level from Catalonia will be EU. What are the steps needed to go there?
Same old, Same old. Government is self-corrupting and is loath to change. People had enough July fourth 1776.
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”
FWIW: The fireworks we watch every Fourth of July holiday are symbolic!!!!
The cashier seems to be envisioning a neoliberal paradise where the nation-state no longer exists. But who, then, collects the taxes that will pay for infrastructure, healthcare, education, public housing, and unemployment insurance? The European Parliament? Will Germans and Finns be willing to pay high taxes in order to pay for those services for Greeks and Spaniards? Look at the unemployment rate in Greece…the Germans would simply say that the Greeks are lazy parasites and don’t want to work (rather than understand that the economic conditions don’t allow for job creation), and they would vote for MEPs that vote to cut taxes and welfare programs.
But maybe this was the plan all along…you create this neoliberal paradise, and slowly but surely, people will dismantle all but the bare bones of the welfare state.
I believe that one of the fundamental flaws in the logic behind the EU is this assumption of mobility. Proponents of the EU imagine society to be how it is described in economics textbooks: a bunch of individual actors seeking to maximize their incomes that don’t seem to exist in any geographic context. The reality is that people are born into families and communities that speak a language. Most of them probably don’t want to just pack up all of their things, relocate, and leave their family and home behind every time they get a new job. People throughout history have always had a very strong connection to the land on which they were raised and the society into which they were brought up; more accurately, for most of human history, this formed the entire existence, the entire universe, of most people (excluding certain oppressed groups, such as slaves or the conquered).
Human beings are not able to move as freely as capital. While euros in Greece can be sent to and used instantly in Germany, it is not so easy for a Greek person to leave the society that their ancestors have lived in for thousands of years and move to a new country with a new culture and language. For privileged people that get to travel, this doesn’t sound so bad, but for someone whose family has lived in the same place for centuries and never learned to speak another language, this experience would be extremely difficult. For many people over the age of 25, it might not even be a life worth living.
In the past, economic difficulties would lead to a depreciation of a nation’s currency and inflation. But within the current structure of the Eurozone, it results in deflation as euros escape to the core countries (mainly Germany) and unemployment. Southern Europeans are expected to leave everything they have ever known behind and move to the countries where there is work, like Germany or Holland. Maybe for a well-educated worldly 18 year old, that’s not so bad, but what about a newly laid-off working class 35 year-old with a wife and kids and no college degree? He’s supposed to just pick up his family and leave his parents and relatives behind, learn German, and spend the rest of his life and Germany? His kids now have to be German? Would he even be able to get a job there, anyway? Doing what? And how is he supposed to stop this from happening, how is he supposed to organize politically to keep jobs at home? The Greek government can hardly do anything because the IMF, ECB, and European Commission (all unelected officials) call the shots and don’t give them any fiscal breathing room (and we saw what happened the last time voters tried to assert their autonomy in the bailout deal referendum), and the European Parliament doesn’t have a serious budget to actually do anything. I’m surprised more people don’t vote for neo-fascist parties like the Golden Dawn. Ordinary liberal politics has completely failed them.