What ex­plains the rise of pop­ulism?

Finweek English Edition - - Opinion - By Jo­han Fourie ed­i­to­rial@fin­week.co.za Jo­han Fourie is as­so­ciate pro­fes­sor in eco­nom­ics at Stel­len­bosch Uni­ver­sity.

con­sider

this thought ex­per­i­ment: Sibusiso and Thu­lani each own a firm that com­petes with the other. In each of the fol­low­ing sce­nar­ios, Sibusiso’s firm out­com­petes Thu­lani’s. Which of the four do you con­sider un­fair com­pe­ti­tion?

1. Sibusiso works hard, saves and in­vests his prof­its, and in­vents new tech­niques and prod­ucts, while Thu­lani’s prod­ucts change lit­tle and he loses mar­ket share.

2. Sibusiso finds a higher qual­ity in­put sup­plier in the US, im­prov­ing his prod­ucts. He there­fore takes mar­ket share from Thu­lani.

3. Sibusiso out­sources some ser­vices to Bangladesh, where work­ers work 12-hour shifts un­der haz­ardous con­di­tions, earn­ing very low wages.

4. Sibusiso brings Bangladeshi work­ers to SA un­der tem­po­rary con­tracts, and puts them to work earn­ing less than the min­i­mum wage.

New re­search shows that the eco­nomic cli­mate in a coun­try ap­pears to have a sub­stan­tial im­pact on in­di­vid­u­als’ po­lit­i­cal sen­ti­ment. Th­ese find­ings could have im­por­tant im­pli­ca­tions for South Africa.

From an eco­nomic per­spec­tive, each sce­nario has a sim­i­lar re­sult: there are win­ners and losers. But peo­ple gen­er­ally re­act very dif­fer­ently to them. Most peo­ple are happy with sce­nario

1 and 2: even if some­one loses (Thu­lani and his em­ploy­ees), this comes through what is per­ceived as fair com­pe­ti­tion from Sibusiso. Sce­nario 3 and 4 cre­ate prob­lems: when Sibusiso “breaks” lo­cal laws (even though it may be le­gal in the for­eign coun­try), his com­pet­i­tive ad­van­tage, and by im­pli­ca­tion in­ter­na­tional trade, is viewed as un­fair.

In a provoca­tive new work­ing pa­per by the Na­tional Bu­reau of Eco­nomic Re­search (NBER), Har­vard Uni­ver­sity econ­o­mist Dani Ro­drik uses this ex­am­ple to ar­gue that too-rapid glob­al­i­sa­tion – the in­creas­ing use of sce­nar­ios 3 and 4 – is the un­der­ly­ing cause for the rise of pop­ulism across the de­vel­oped world. The “losers” from glob­al­i­sa­tion feel that for­eign­ers – abroad or as im­mi­grants in their own coun­tries – have taken un­fair ad­van­tage, steal­ing their jobs. They have cho­sen the pol­i­tics of pop­ulism as a way to “pun­ish” this rapidly glob­al­is­ing world.

Economists know that free trade cre­ates win­ners and losers, and that the win­ners al­most al­ways gain more than what the losers lose. If the win­ners could per­fectly com­pen­sate the losers, every­one would be bet­ter off from a free-trad­ing world.

But Ro­drik ar­gues that such com­pen­sa­tion is not al­ways easy, and rarely hap­pens. Aside from many Euro­pean na­tions, where an ex­ten­sive so­cial safety net was in­sti­tu­tion­alised to sup­port “losers”, most coun­tries failed to suf­fi­ciently com­pen­sate those that suf­fered the con­se­quences of open bor­ders.

Make no mis­take: open bor­ders re­sulted in mas­sive global gains, no­tably for the poor of China and In­dia. But in each coun­try, as trade the­ory pre­dicts, there were losers.

Peo­ple think they’re los­ing ground not be­cause they had taken an un­kind draw from the lot­tery of mar­ket com­pe­ti­tion, but be­cause the rules were un­fair and oth­ers were tak­ing ad­van­tage of a rigged play­ing field, says Ro­drik.

Many stud­ies back this claim. In a 2016 pa­per, David Au­tor and co-au­thors show that the trade shock of China join­ing the World Trade Or­ga­ni­za­tion (WTO) ag­gra­vated po­lit­i­cal po­lar­i­sa­tion in the US: dis­tricts af­fected by the shock moved fur­ther to the right or left po­lit­i­cally.

Analysing the Brexit vote, Italo Calon­tone and Piero Stanig show that re­gions with larger im­port pen­e­tra­tion from China had a higher Leave vote share. They re­peated the study for 15 Euro­pean coun­tries, show­ing that China’s en­try into the WTO had sim­i­lar po­lit­i­cal con­se­quences across

Europe. In a 2017 work­ing pa­per,

Luigi Guiso and his co-au­thors use Euro­pean sur­vey data to draw even more pre­cise con­clu­sions: the more in­di­vid­u­als are ex­posed to com­pe­ti­tion from im­ports and im­mi­grants (there­fore the higher their eco­nomic in­se­cu­rity), the more they vote for pop­ulist par­ties.

Ro­drik con­structs a model to ex­plain this pop­ulist rise on both the left and right. Ac­cord­ing to the model, there are three dif­fer­ent groups in so­ci­ety: the elite, the ma­jor­ity, and the mi­nor­ity. “The elite are sep­a­rated from the rest of so­ci­ety by their wealth. The mi­nor­ity is sep­a­rated by par­tic­u­lar iden­tity mark­ers (eth­nic­ity, re­li­gion, im­mi­grant sta­tus). Hence there are two cleav­ages: an ethno-na­tional/cul­tural cleav­age and an in­come/so­cial class cleav­age,” says Ro­drik. “What may look like a racist or xeno­pho­bic back­lash may have its roots in eco­nomic anx­i­eties and dis­lo­ca­tions.”

Pop­ulists who em­pha­sise the iden­tity cleav­age tar­get for­eign­ers or mi­nori­ties, pro­duc­ing right-wing pop­ulism. Those em­pha­sis­ing the in­come cleav­age tar­get the wealthy and large cor­po­ra­tions, pro­duc­ing left-wing pop­ulism. The large num­bers of im­mi­grants into Western Europe has re­sulted in the rise of right-wing pop­ulists, for ex­am­ple, while Latin Amer­ica, be­cause of large dis­par­i­ties be­tween rich and poor, has seen more left-wing pop­ulism. Th­ese find­ings have im­por­tant im­pli­ca­tions for SA. We joined the WTO in 1995 and lib­er­alised our com­pli­cated tar­iff sched­ule, open­ing our bor­ders to for­eign com­pe­ti­tion. There were many win­ners from cheaper im­ports, no­tably con­sumers, but some firms and in­dus­tries strug­gled, lead­ing to job losses, of­ten con­cen­trated in cer­tain re­gions.

SA rolled out an im­pres­sively com­pre­hen­sive so­cial safety net for a mid­dle-in­come coun­try, but it could not com­pen­sate all the losers, es­pe­cially as the global fi­nan­cial cri­sis hit in 2007 and un­em­ploy­ment wors­ened. It’s not en­tirely co­in­ci­den­tal that the first large-scale xeno­pho­bic at­tacks on for­eign­ers hap­pened in 2008 (what Ro­drik would call rightwing pop­ulism) and that the ANC shifted left with the elec­tion of Ja­cob Zuma as pres­i­dent in 2009.

Even if glob­al­i­sa­tion cre­ates more win­ners than losers, the losers may feel that the sys­tem is rigged, and re­tal­i­ate by vot­ing for more pop­ulist par­ties. As SA stum­bles into an­other re­ces­sion, this may have pro­found con­se­quences for the ANC’s De­cem­ber elec­tive con­fer­ence – and na­tional elec­tions in 2019. ■

Pro-Brexit and an­ti­im­mi­gra­tion ac­tivists gather on 31 March in Lon­don for a demon­stra­tion to cel­e­brate Bri­tain’s exit from the EU.

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