The United Kingdom voting to take leave from the European Union has been a shocker for the financial markets and 10 Downing Street, that had put its entire weight behind the remain-with-Europe camp. But for the elites of the world, the vote is a shot across their bow. The message from Brexit is simple: the post-second world war financial, trade and industrial order and security arrangements that developed around Bretton Woods, have passed their expiry date. These systems need an urgent reordering to reflect current economic and strategic realities, in order to retain the confidence of the ordinary people whose lives are governed by them.
Reserve Bank of India Governor Raghuram Rajan’s reaction to the Brexit vote summed it up best. Even as he looked to calm financial markets, Rajan pointed out that the mood towards globalization has changed, with the referendum reflecting the anger of the common people at what globalization has wrought to their jobs and livelihoods. He advised corrective political action as key to maintaining order while ensuring that reforms do take place.
A careful look at the voting pattern bears out this fact. London contributes a quarter of the UK’s GDP, which is already 78% dependent on services, of which financial services is the dominant contributor. London is the world’s largest financial services centre and the city’s GDP is equal to that of Saudi Arabia[1]. London’s status as a global financial hub and successful tax haven has been cemented in the current financial architecture, and its inhabitants, leading the high life, are at dissonance with the rest of the country. Little wonder then, that Britons ex-London, want to rejig the system by taking Britain out of the EU.
At the core of British anger is the deindustrialization of the UK. The great manufacturing base that once led the Industrial Revolution, has shifted out of the country, mostly to China. And services which could have absorbed some of those displaced from industry, has a global cast which attracts highly talented individuals from all over the world not just the EU, but from the Commonwealth nations as well. Technology reduced agriculture’s job-creating capacity. The Brexiteer also doesn’t see how mega-trade agreements like the Transatlantic Trade and Investment Partnership, being negotiated by Brussels, will result in a job at home in the future.
So local politics has now disrupted the economics of globalization that was deemed as unstoppable.
Similar disruptive sentiments are at play in the U.S. elections, where Republican candidate Donald Trump has called for a relook at the post-second world war security alliances. This should apply even more to corresponding elite economic arrangements, now already fraying.
This then, is the time for countries, regional unions and global institutions to reform themselves – putting people instead of regulations and strategic objectives at the centre of their decision-making. Britain must focus on job-creation. The EU must stop being obsessed with regulatory processes and focus instead on outcomes for people. Regional unions are not sacrosanct, but merely arrangements to facilitate economic exchanges. Brexit means that Britain, for instance, is merely leaving a customs union with Europe. Multilateral institutions like the IMF and the World Bank must finally recognize that one size does not fit all.
India, which is now stepping into new global arrangements, must not be seduced by old and tired verities, now proven defunct by Brexit. The country must follow its political instinct, which called a pause for its entry into various bilateral and multilateral trade agreements, with their negative fallout on local industry and jobs. And Indian industry, which has been rushing to invest abroad, must invest in the safer harbours at home, creating stability through jobs.
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References
Kelly, Jon, ‘London-centric’, BBC News, 30 September 2015, <http://www.bbc.co.uk/news/resources/idt-248d9ac7-9784-4769-936a-8d3b435857a8>