After a dramatic political year David Herdson looks at the big picture

After a dramatic political year David Herdson looks at the big picture

David Herdson outside a famous front door

Globalisation is pushing democracy to breaking point. What will give first?

It started with a ship; the Belen Quezeda to be precise. Built in 1884 in Aberdeen, she led a colourful life. Originally named the Zafiro, she ploughed her trade as a collier before being bought by and commissioned into the US navy when it was short of a supply vessel during the Spanish-American War. After her naval service, she passed through further American, Mexican and French hands before being rebuilt in Canada during WWI and finding her way into the footnotes of history. Her rebuild caused her difficulty with the authorities and in 1919, her new owners decided to resolve that problem by renaming her and, more crucially, re-registering her in Panama under that country’s laxer maritime rules. As such, she was the first ship ever to fly a flag of convenience and in so doing, opened up a whole new competitive international market for regulation.

There’s an irony that the birth of that market, so essential to globalisation, should have occurred at a time when the vast inequalities of the 19th century were being eroded not only by the violent forces of war, revolution and recession (and the taxes necessary to pay for them) but also by concerted government action to improve living conditions for the poorest.

Indeed, for a long time, the two processes continued in parallel. Improvements in social conditions and in income were driven both by market mechanisms – companies competing for scarce labour – and by political pressure leading to government intervention. At the same time, the largest or the most mobile firms began to exploit the possibilities of physical or legal relocations.

For a while, the processes could. The number of companies who could act as the owners of the Belen Quezeda did was extremely limited. The great majority of even the large conglomerates were tied to a parent country and that country could regulate as it saw fit (and in any case, most countries that might have been practical alternatives were pursuing much the same policies as each other, so the incentives to relocate tended to be small).

No longer, and not for some time. Europe was the first breach in the construct of national regulation as it actively pushed for its single market in goods, people, services and capital. However, uniquely, Europe also developed a political structure to counter that risk of a race to the regulatory bottom, as Jacques Delors recognised when he pushed for social legislation at a European level to counterbalance the forces of capitalism.

In the world of the late-1980s, that might have worked but the world has moved on. The internet, cheaper international transport, globalised markets, lower trade barriers, a more mobile workforce at both the top and the bottom, the emergence of China as an economic superpower (plus other non-OECD rising powers), competition within OECD countries to attract inward investment and relocations, competitive tax regimes; all have tipped the balance towards the corporations and away from the regulators.

Two groups have benefitted above all from these immense structural changes: the extremely rich and the extremely poor. Extreme poverty has been cut by nearly three-quarters across the globe over the last 30 years, lifting well over a billion people out of that category. At the same time, the wealth of the richest has rocketed: one study found that while in 1978, the richest 0.1% of US families owned 7% of the country’s total wealth, by 2012, they owned 22% of it – their highest share since the early 1930s. The U-curve of that group’s wealth share from the early 1900s to today is far from unique to America.

Unsurprisingly, the group that has been squeezed in that pincer is the middle (although in global terms, the great majority of the populations in OECD countries form part of that ‘middle’). Again, America offers the best example: according to the same study, real household incomes for the bottom 90% have not increased at all on a like-for-like basis since 1986. That simple fact goes a long way to explaining the appeal of Donald Trump (despite his being a member of the 0.1%). It goes a long way to explaining the appeal of Bernie Sanders too, for that matter.

Equivalent facts in other countries go a long way to explaining the appeal of Le Pen, of Tsipras, of Grillo, of Farage, of Wilders and of AfD. Certainly, cultural factors played a big part in the rise of these populist candidates or parties but economic stagnation of specific classes of people plays harmony to the strident melody of the populists’ message of fear and blame. And because no matter how rich or poor you are, the votes all count the same (or at least, the same as someone next door), their voices for once do count.

The question for first-world leaders is what, if anything, can be done about it. Ultimately, where revolution was avoided, the great magnates of the late 19th century were tamed by national regulation and political action. When today’s companies operate on a global level and in a largely free-trade environment, that option doesn’t exist (and even if it did, it would only address one factor). Apple, for example, operates world-wide. If the tax regime in Ireland – its European headquarters – worsens sufficiently, it could up sticks and head elsewhere. HSBC publicly flirted with relocating its head office out of the UK (and out of the EU) before the last general election; by what was perhaps not a coincidence, George Osborne cut the Bank Levy at the first Budget after it.

Put together competitive tax and regulatory regimes, geographically mobile companies (and the billionaires who own them), globalised markets and rampant salary inflation for chief executives and star staff and it’s unsurprising that inequalities have increased. And inevitably, those same structural factors will see them increase further because all the pressure comes in one direction. Unless.

There has to come a breaking point. Politics in the widest sense always finds a solution, though not always through the democratic process. So far, it has done, broadly speaking. Events such as Brexit or Trump’s election (or Hofer’s near-election in Austria) might have been shocking to the mainstream, whose values have been so strongly challenged, but they are the natural consequence of the mainstream failing to deliver a fair share of growth for the majority.

The darker question is what happens when these populists fail to deliver either, as they no doubt will fail to. After all, if the mainstream professionals can’t arrange for the cake to be divided up more equitably, what chance do a bunch of rowdy amateurs have – particularly if their actions shrink the rate of the cake’s growth? The resentment that produced the peoples’ revolts so far would distil into, on the one hand, disillusionment and cynicism, and on the other, more violent and more extreme views; the former removing some of the natural brakes on the latter.

That outcome could be prevented by a global framework that enables innovation and growth but prevents that growth from being skimmed by a tiny elite – but that’s an incredibly tough ask when so many countries have no interest in signing up to such a framework.

Perhaps Marx had a point after all.

David Herdson

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