What does Brexit mean for poor people?

The shock waves of Brexit are still echoing. For those, like myself, who are on the losing side of a democratic vote there is a temptation to resort to hyperbole and exaggeration. Remember that Chicken Little, the chick that believed the sky was falling, gets eaten by the fox at the end of the story. The reality is that none of us can really know what the effect of Brexit will be. But it is almost certain that the world this morning is different. Many will be affected and, as is so often the case, the poorest people on this planet will suffer the most from actions and decisions taken by those in relatively prosperous societies.

Why do I say this? Because Brexit represents the first tangible retreat from globalization in my lifetime. For 70 years the world has built its prosperity through an expansion of trade and technology and an ever-freer movement of capital and, to a lesser degree, of people. It’s long been recognized that there are winners and losers from trade and globalization, but its proponents have always believed that domestic political systems, especially in mature economies, would be sufficiently adept at redistributing the gains so that most people benefit. This is the faulty logic that Brexit has revealed. The group of losers from globalization in its current form is strong enough politically to say “stop.”

Economists understand that globalization will help remove artificial, man-made barriers to equality. It creates what we term “factor price equalization.” Technically, this means that wages for equivalent skill levels will tend to converge. This has been very good news for those living in countries with very low wages. These workers have seen substantial gains. It has been less good news for those whose wages were high to begin with. It is unclear whether their wages have actually fallen, or even if they have risen by less than they otherwise might have done, but workers in advanced economies have not enjoyed the same degree of rising prosperity that others have benefited from in the last 40 years.

Labor markets are complex. Wages do not rise and fall in unison everywhere. Those with jobs are more protected than new entrants to the labor force. The wage impact has been most severely felt by young people. Entry level wages in Western economies have stagnated.

So, from a purely economic point of view, Brexit should have been driven by young voters. In reality, the exact opposite is the case. It is older voters who have opted out. Why? Probably because of their fears of immigration. Anti-immigrant sentiment is the second dagger penetrating globalization. The cross-border movement of people is central to a globalized world. Those who believe otherwise probably also enjoy Hamlet without the Prince. Of course immigration should be managed and orderly. Like trade, it brings great benefits to both sending and recipient countries, in the aggregate. Repeated economic studies point to the gains for poor households from remittances; more significantly, perhaps, they also point to the sharply higher demand for education when the prospects for emigration rise. Everyone gains when more people in the world are more educated. Studies also show that receiving countries benefit from immigration. Contrary to some claims, jobs for natives and their wages rise with immigration, both for skilled and non-skilled occupations. There is a complementarity not a substitution in labor markets. There are also benefits to taxes, net of public services received by migrants.

Economists believe that if some people are materially better off, while no one is worse off, then the world is unambiguously a better place. This is the core presumption behind support for globalization. What we are finding out is that this might not be how people feel. Humans like to compare themselves to others. The most common reference groups for determining our happiness and well-being are our parents and our neighbors or countrymen. Behavioral psychologists have done experiments to suggest we also feel worse about falling behind compared to getting ahead. So there is stress and worry for those who see others moving forward without opportunities for themselves.

This is today’s globalization. Enormous opportunities for some. Few opportunities for others. It is a process that has brought hundreds of millions of people out of poverty and that has allowed perhaps 3 billion to enjoy a middle class lifestyle. But it will have to change its form if it is to continue to get the support of a majority of people in the richest countries in the world who still write the rules for the global economy. The political support for globalization is on the wane. If Brexit is an isolated event it can be contained. If it is the start of a more pronounced backlash against globalization, we should all worry, most of all those of us who are concerned with the lives of the poorest people on our planet.

(A side note. Brexit is an indisputable poke in the eye of “experts.” Will the wisdom of the crowd prove better than the wisdom of self-ordained experts? Only time will tell, but it is sobering how little credence is given to the voice of those who are paid to study and act on the economic and social policies of our times.)