Progressive Futures

The great globalization disruption

27 March 2019

Democracy, capitalism and inequality in the industrialised world

Patrick Diamond
Image: Shutterstock.com

This is an excerpt from the Policy Network book The crisis of globalization, published by IB Tauris, an imprint of Bloomsbury.

In recent years, globalization has entered a new phase driven by structural shocks from financial crises to the undermining of representative democracy. This is an age of upheaval and disorder epitomized by the rise of Donald Trump to the presidency of the United States, Great Britain’s unanticipated departure from the European Union (EU), and the rapid growth of populist parties in the established democracies of Europe, as well as in the Southern and Eastern periphery. We are living in a new world which makes us, in Margaret Mead’s evocative phrase, ‘immigrants in our own land’ (cited in Hall 2015: 255). The ‘great globalization disruption’ relates to the ongoing integration of capital, labour and product markets alongside structural economic and technological change. Economics and politics are pulling in opposite directions. The logic of market liberalism demands greater openness, free trade and deregulation to sustain global growth and expansion. Yet the politics of Western democracies implore greater national protectionism, using the nationstate to defend citizens from market forces that have little respect for established political bargains and solidarities. The social contract that sustains liberal democracy is under strain. 

This volume asks what challenges the ‘great globalization disruption’ will pose for progressive social democratic and liberal politics across Europe and the United States. The first section of the chapter examines the background to the ‘great disruption’, in particular the breakdown of the post1945 social contract. The chapter then outlines the central themes and core argument of the volume. One of the most remarkable features of the 2008 crisis has been the muted ideological response, particularly on the left. Neoliberalism has dominated politics for so long it has become almost impossible to envisage credible governing alternatives. The book seeks to understand the new era by bringing together contributions from leading thinkers and scholars who debate the structural causes and political consequences of the ‘great globalization disruption’. The collection aims to forge a compelling response that reunites the imperatives of economic integration, democratic legitimacy and national sovereignty with the goal of a fairer, more equal society, as a generation of progressive leaders achieved so skilfully in the aftermath of World War II. 

The debate about globalization is often confused because established scholars are not always clear what they mean by ‘globalization’. In conventional accounts, globalization refers to the integration of capital, product and labour markets across the borders of national politics. Anthony Mcgrew (2010: 16) defines globalization as, ‘a longterm historical process that denotes the growing intensity of worldwide interconnectedness: in short, a “shrinking world’’’. Numerous political controversies are blamed on globalization including the fragmentation of welfare states, the collapse of social democracy, and the growth of popular opposition to immigration. The term has become so ubiquitous that it is used to explain virtually any shift in statesociety relations. Writers from the US economist Stephen D. King to The Financial Times commentator Martin Wolf predicted the end of globalization. Yet the pace and scale of global integration has scarcely diminished. Since the early 1990s, trade and foreign direct investment flows have increased from 0.9 to 3.2 per cent of global GDP (OECD 2017: 3). 

The expansion of the global economy, trade liberalization, and the shift in the relative power of states – with China rapidly ascending and the west declining – have been felt most acutely in the destruction of industrial and manufacturing employment. During the first decade of the twenty first century, the UK and the United States, having suffered a major deindustrialization ‘shock’ in the 1980s, both experienced a further dramatic decline in manufacturing, a consequence of China joining the World Trade Organization (WTO), and the accession countries of Central and Eastern Europe entering the European single market (Gamble 2016). Bluecollar industrial workers, once the backbone of the Western economies, were rapidly displaced. The sense of anger and grievance, especially among work ing class communities, was palpable. Two other factors compounded the impact of deindustrialization on the politics of Western democracies. 

The first factor is a general rise in volatility. Instability has increased because financialization and the contagion effects of financial crises have intensified the impact of shocks across the international system. The advance of globalization continued against the backdrop of the 2008 crisis and its aftermath. Western economies have been caught in a ‘deflationary trap’; interest rates are held at historically low levels, as central banks are compelled to print money through ‘Quantitative Easing’ (QE) to inject liquidity into the economy (Gamble 2016). The conundrum for policymakers is that the policies of QE and bank ‘bailouts’ designed to support aggregate demand have advantaged existing owners of assets, to the detriment of wage earners. The inequalities created by the neoliberal policy consensus of the last three decades including weaker collective bargaining, deregulated labour markets, cuts to personal and corporate taxation, and reduced social security entitlements have fuelled the rise of social and economic inequality. The policy response to the 2008 crisis has exacerbated the root causes of inequality. 

Nor are the longterm prospects for the global economy especially favourable. Despite some initial ‘green shoots’, we are living in a climate of deflation and ‘secular stagnation’ where growth rates are languishing or even declining. While the 2008 crash destroyed a significant chunk of productive capacity, particularly in countries such as Britain and the United States where the economy is heavily weighted towards financial services, sluggishness in Western countries is the consequence of the fundamental shift in economic power from west to east. There has been much interest in developments such as ‘reshoring’, where productivity improvements made possible by digital technologies have led to manufacturing capacity returning to industrialized countries. Nevertheless, manufacturing is less important to the world economy as a whole, while future growth is likely to be driven by the expansion of services, particularly in retail, hospitality, health, education, domestic services, personal care, and so on. In this climate it becomes harder to raise productivity and employment; services are, ‘inherently less conducive to productivity growth’ since they are ‘sheltered’ from international trade and less likely to benefit from technological innovation (Iversen and Wren 1998: 512). Meanwhile, manufacturing is contracting in the emerging market countries, and the prospects for longterm global growth appear weak (Rodrik 2012; Gamble 2016). 

Moreover, while there has been a modest upswing in the global economy, it is not easy to see where the next phase of sustainable growth will come from. There is little indication of any imminent return to the multilateral world order once underwritten by the United States, which is now being undermined by the ‘America First’ rhetoric of the Trump Administration. The global system since 1945, and especially since 1989 in the aftermath of the collapse of the Berlin wall, relied predominantly on US leadership. But today, open markets and free trade are less acceptable to key sections of the American electorate given their association with economic restructuring and industrial dislocation, which is linked to offshoring, falling real wages and job losses. The global governance regime of regulations and rules is less stable with greater fragmentation occurring across the regions of the world economy, as national governments attempt to exert greater influence (Rodrik 2012). Neither the United States nor China is able to exercise unqualified global leadership. Against this backdrop, the period of stagnation since the late 2000s promises to make the ‘next phase’ of globalization in the industrialized countries even more politically unsettling. 

A second factor compounding the political impact of deindustrialization has been the claim of neoliberals that nations can prosper only by liber alising their economies and societies. This has led to striking cutbacks in the protective role of the state. In the liberal market regimes such as the UK and the United States during the interwar years, and even more acutely during the ‘neoliberal’ era since the late 1970s, domestic political action was restrained in the name of limited government to allow capital and labour to flow more freely throughout the global economy. During this period there was a move towards floating exchange rates, personal and corporate taxation was cut dramatically, and expansionary fiscal policy was largely jettisoned even in times of economic distress, while structural reforms were imposed to free up labour and product markets (Rodrik 2012). Economic openness and market liberalism were believed to be mutually intertwined. 

The effect of these policy changes over the last 40 years has been to make economics and politics across the industrialized nations into unnatural bedfellows. According to the logic of neoliberalism, economic imperatives must prevail over democratic institutions and political decisionmaking, creating a backlash among disgruntled citizens while explaining the rise in support for populist and challenger forces. Not surprisingly, the process of globalization as well as advancements in technology that pose a threat to jobs and living standards have led to growing dissatisfaction with political outcomes in Western democracies. The fundamental issue with globalization and trade is not that politically potent coalitions of ‘winners’ and ‘losers’ suddenly emerge. As the Harvard economist Dani Rodrik emphasizes, there have always been winners and losers in capitalist economies; market forces lead to patterns of ‘creative destruction’ while technological advancements in domestic markets generate rapid changes in employment alongside rising inequalities in wages and relative living standards. The burning political issue in recent decades has been that the liberalization of trade and economic openness are perceived to produce increasingly unfair results; capital, goods and labour move rapidly across borders with little respect for national political sovereignty; globalization is thus believed to erode domestic political norms, to undermine democratic bargaining, and to threaten longstanding social contracts (Rodrik 2012). 

Established parties have struggled to respond to rising dissatisfaction following the breakdown of the social contract. For decades, the prevailing ideology of neoliberalism emphasized the limited role of governments. Insurgent ‘authoritarian populist’ parties have sought to exploit rising economic and political discontent. These parties are ‘authoritarian’ in three distinct senses: firstly, they exploit voters’ desire for security in the face of disorder relating to terrorism, crime and loss of stable employment; secondly, these parties urge ‘conformity’ to established social norms and moral values; thirdly, populist leaders demand ‘obedience’ to those who offer an image of strong group identity and a coherent sense of loyalty and protection (Norris and Inglehart 2018: 10–11). That vision is based on grievances, including an oversimplified version of reality that harks back to a bygone era which may, or may not, have ever actually existed (Hall 2013). 

As a consequence, the next phase of ‘knowledgedriven’ globalization is likely to create new dividinglines that undermine established party systems, while allowing ‘challenger parties’ to break into the electoral marketplace. The traditional cleavages in European democracies are being replaced by new divisions centred on educational achievement. The ability to access the labour market and to secure a highwage job in a competitive global economy is now heavily dependent on access to higher education. The fulfilment of the liberal ideal of meritocracy might be considered cause for celebration, but the repercussions are troubling. More fundamentally, the rise of the global elite convinces those who have done well out of globalization that their rewards have been earned, so they owe few obligations to the rest of society (Hall, 2015). 

The tectonic shifts in politics that resulted were symptomized by the knifeedge decision of UK voters to leave the EU in June 2016; the November 2016 election of Donald Trump to the presidency of the United States; the defeat of Matteo Renzi’s proposals to change the Italian constitution in a referendum; and the rise of electoral support for populist forces of the left and right throughout Europe. There is a growing sense that the democratic consent for transnational governance, free trade and liberalization is eroding, as politics almost everywhere is deemed to be in a state of unprecedented upheaval. Few established parties have a coherent strategy for breaking out of the impasse. 

The root cause of the malaise is that since the financial crisis and Great Recession in the aftermath of the 2008 meltdown, global capitalism no longer appears capable of generating broadly shared prosperity. The ten years since 2008 have witnessed the slowest and most anaemic recovery in the history of Western capitalism. The International Monetary Fund (IMF) revealed the persistent weakness of global productivity in goods and services, particularly in Europe which has been adversely affected by an unprecedented debt crisis (Arias and Wen 2015). Serious recessions usually have longterm ‘scarring’ effects. The 2008 crash altered the regional and sectoral composition of globalization, strengthening emerging market countries relative to the advanced economies. This shift will have serious repercussions for the future legitimacy of global capitalism. If the next phase of globalization and the anticipated ‘great disruption’ lead to an acceleration of economic influence to the east, given that economic crises often produce a ‘rebalancing of power’ between states, the domestic political consent for openness in the industrialized economies is likely to be further eroded. 

The legitimacy of globalization is diminishing because, for many voters, the economy appears broken and politics is palpably failing them. Wages and living standards have been falling for 30 years in the face of declining productivity and the longterm shift in bargainingpower from labour to capital. In the context of globalization, workers may have benefited from gaining access to cheaper consumer goods, but the benefits have been outweighed by the persistent decline of real wages. According to the Organization for Economic Cooperation and Development (OECD), the proportion of national income allocated to wages has fallen in almost all of the industrialized nations since the 1970s (OECD 2012). Economic insecurity is rising, fuelling popular discontent with public bureaucracy and representative democracy, particularly at the EU level (Hall 2013). The ‘blue collar’ workingclass has become contemptuous of the political establishment, which increases the salience of attacks on technocratic expertise and privilege, adding ballast to populist voices and sentiments. The new divide in European politics is between those who live in places that are connected to new sources of global growth, and those who reside outside the zones of economic expansion; dynamic urban, cosmopolitan centres are increasingly divorced from suburban towns and rural communities where more conservative and socially authoritarian values prevail (Jennings and Stoker 2017). Geographical polarization is heightened by the rise of the ‘intangible economy’ which creates more socially disruptive forms of inequality (Haskell and Westlake 2017). As a consequence, the central pillars of representative democracy are under unprecedented attack.