Back to all articles

Brexit – why politics and economics are at odds

| Investments, Market Forces

The Rise Of The Mercantilist Agenda
As a graduate student of economics years back, I remember reading Adam Smith and David Ricardo, economists who espoused the idea that free trade was a catalyst for wealth creation. However, what may be true at a macro level belies the real transfer of wealth from losers to the winners in this trade battle played on a global level. The theory of economics too easily assumes that participants adjust and adapt without taking into account that rapid and dramatic economic adjustment may take a drastic toll on societies and as result may lead to widening inequality within societies and between countries. This is economic utopia at its best. It was an idea French economist Thomas Piketty reinforced at his inaugural Nelson Mandela lecture last year. And this is where politics and economics are at odds.
In a democratic society, the distribution of wealth gained through a Darwinian economic system and free trade has a real impact on households unless policies are put in place to channel some of the net gains accruing to society at large to soften the blow for those suffering its worst consequences, such as loss of income and employment. Six decades after the signing of the Treaty of Rome, which led to the formation of the EU, one of its key members has filed for a divorce, with all its traumatic consequences. Rural England is clearly at odds with most of suburbia.
While Brexit may have grabbed the headlines, there has been a ground swell globally in many democratic societies with the electorate backing politicians spewing nationalistic and populist rhetoric – a clear sign that seven years post the global economic crisis, a below-par global recovery has disenfranchised vast tracts of the population with issues such as youth unemployment and stagnant middle-class wages a global phenomenon. While it may be easy to appeal to nationalist fervour to push an anti-free trade agenda, as Boris Johnson or Donald Trump have found, it is far more difficult to craft policies based on isolationism as a driver of wealth and growth over the long term.
The form of the UK’s divorce from the EU remains to be seen. On the one end of the spectrum, an amicable split may well be struck over the coming year with visitation rights and existing trade agreements remaining in place, which would soften the economic blow considerably. On the other hand, if Britain chooses economic isolation it would mark an end to free visitation rights with Europe and will hamper trade, with worse consequences for its economy heavily dependent on EU partners.
Perversely, in the UK the Brexit vote has forced the UK Prime minister to step down, a vote of no confidence towards the main opposition leader. Ironically, the lead campaigner for Brexit decided not to stand for the vacant post! This should reinforce the message that it is the duty of all politicians to unite society and build a common vision that will benefit society as a whole. Brexit and its subsequent political fall-out caused Britain to suspend its Independence Day celebrations and it is now searching for a new cheerleader in chief for its victory parade.
While a protest vote may well atest to the fact that Ricardian gains from free markets have accrued to few, going back to an era of mercantilism, where the nationalist agenda dominates, may have much worse consequences. After all, 60 families control half the globe’s wealth according to an Oxfam report. As a young democracy, such flash backs of the past are reminders of an era we would prefer to leave behind!

Print Friendly, PDF & Email
Show Comments

Comments are closed.

Forex rates by TradingView