2016 Annual Review
By Nouriel Roubini

The populist backlash against globalization can be contained

This populist backlash against globalization is a threat to large multinational corporations, financial institutions and exporting businesses in advanced economies that are still benefiting from globalization and disruptive technological innovations.

While the global economic recovery is continuing at a solid pace, asset prices such as US equities are reaching new highs, and new radical technological innovations may lead over time to significant increases in productivity and global welfare, 2016 has also been the year of a rising populist backlash against globalization that has taken many and different forms: a rise of protectionism restricting trade in goods and services; restrictions to international labor mobility and migration; resource nationalism; restrictions to inward and outward foreign direct investment and capital controls; a backlash against disruptive technological innovations (cab drivers opposing Uber, hoteliers and their unions opposing Airbnb for example); economic nationalism and populism; and the rejection of supra-national authorities (such as the EU and the Bretton Woods institutions). 

It started with the Brexit referendum in the UK and the presidential victory of Trump in the US, but it is now likely to spill with greater virulence into the Eurozone. Indeed, the US and the UK have done better economically since the global financial crisis than continental Europe and the Eurozone countries: sharply falling unemployment rates to below 5 percent, strong job creation, and growth at or above potential. But British citizens scared of "Polish plumbers" decided to leave the EU, while white blue collars and other "losers" from globalization voted for the outsider protectionist and populist Trump. 

In the Eurozone, unemployment is still above 10 percent and much higher in the periphery and among the young; job creation has been anemic, incomes have stagnated and growth has been below trend for a while. Thus, the risk of a more severe backlash against globalization is stronger than in the US and the UK. No wonder that then Italian Prime Minister Renzi lost a constitutional referendum by a very large margin and that the anti-EU Marine Le Pen may win the French presidential election (after Brexit, the Trump election and the Renzi defeat, anything is possible).

This backlash against globalization should not be surprising. Even basic economic theory suggests that in advanced industrial economies, freer trade, migration and technological innovation tend to benefit owners of physical and financial capital and the highly skilled workers who can survive and thrive in a globalized and digital global economy; instead, low-skilled and medium-skilled blue collars and now even white collars will have their jobs and incomes threatened by globalization and new disruptive technologies. 

In the past, the "losers" from globalization accepted passively the internationalist bent of establishment parties: Social and religious conservatives voted Republican or Tory even if their economic interests were increasingly at odds with the pro-Big Business and pro-Wall Street and City outlook of established center-right parties; and on the left, "losers" still voted for the Democratic Party of Clinton/Obama or Blairite Labor as the elites of these parties were socially progressive and in favor of a welfare state and a large social safety net for the poor and the "losers." 

But now the losers from globalization have increasingly rejected the pro-globalization tendencies of mainstream parties and have mobilized politically: either with the rise of new anti-establishment, anti-status quo populist parties of the extreme right or extreme left (as in the core and the periphery of the EU/Eurozone); or by anti-globalization populist politicians highjacking and taking over traditional pro-globalization establishment parties (Trump and Sanders in the US, Brexit supporters within both the Tory and Labor parties in the UK). 

This populist backlash against globalization is a threat to large multinational corporations, financial institutions and exporting businesses in advanced economies that are still benefiting from globalization and disruptive technological innovations. And there is a risk that the backlash may become severe over time: Protectionism and restrictions on migration may become more virulent and severe, but over time even a wall on the border with Mexico and tariff barriers against China and other alleged "unfair traders" will not save jobs as disruptive technological innovation is capital-intensive, skill-biased and labor-saving. 

Thus, even benevolent and socially responsible businesses who care about minimizing this backlash will find it hard to enact policies that go against broader macro and technological trends. The solution instead has to do with public policy: Governments need ways to either compensate the "losers" or provide them with the skills, retraining, education and human capital to thrive in this globalized and digital economy.

Maintaining the benefits of globalization and technological innovation will be hard but feasible: Both reduce the costs of goods and services and thus benefit directly all consumers including those who—as producers—have jobs and income threatened by these trends. And we are on the cusp of a technological revolution that will change the world for the better in the next few decades and provide great upsides for new and existing private businesses and productivity growth. Indeed, the industries of the future include ET (energy technologies such as non-traditional fossil fuels and alternative energy); BT (bio-technologies that will make us live longer and be healthier); IT (information technologies including cloud computing, Internet of Things and artificial intelligence (AI)); MT (manufacturing technologies such as robotics, automation, 3D printing and personal manufacturing); FT (financial technologies, or fintech, that will radically change the provision of financial services from payment systems, credit allocation, insurance and asset management); and DT (defense technologies such as drones and applications of high-tech to weapon systems). If these innovations have negative distributional impacts (a rise in inequality as innovation is capital-intensive, skill-biased and labor-saving), appropriate public policies (including eventually a Universal Basic Income) will need to be implemented to ensure that the benefits of globalization and technology go to all.

Thus, there is a path that maintains open markets and technological innovation while avoiding the populist backlash against them by implementing inclusive policies. It is up to business and political leaders to provide the vision and leadership to ensure that the open global economic system designed by the US and its allies 70 years ago continues to provide benefits to most people across countries and within countries.


Back to the Annual Review landing page