Sunday, June 26, 2016

Brexit: The United Kingdom Referendum on European Union Membership

The UK votes to leave the European Union.

On Thursday, June 25rd, 2016, the United Kingdom voted 52% to 48% to leave the European Union. The majority of voters in England and Wales (except for London) voted to leave the EU, while voters in Scotland and Northern Ireland voted to remain with the EU. Turnout was especially strong among the leave side.

The British decision to exit the EU is about the failure of globalization to improve the standard of living for the average person in the UK. The vote expresses the concern that the economic position of poor and middle class workers has gotten worse.  The UK voters believe they have “lost” out due to increased competition from immigrants. And the voters want to blame and punish someone.

In addition, our western political systems have been unable “cushion the blow” on those affected by globalization. Neither the market economy nor government has delivered economic security and prosperity to the middle class.  There are fewer jobs, higher prices, and less opportunity. The next generation will be worse than the current.   And forget the effects on the poor in rich countries.

The theory behind globalization is an old and simple theory that is considered economic gospel.  It is David Ricardo’s theory of comparative advantage that says trade make everyone better regardless of comparative position. Basically, even if I make everything better and cheaper than you trade will still help us both. Trade will increase growth and make everyone better off.  The theory works great in a simplified world; but not the real world. In our world, there are layers of complicating factors such as technology, monopolies and governments. The net results of neo-liberal free trade has been a siphoning off of the benefits by corporations and the rich, leaving many in the developed world worse off. In that kind of environment, we can understand voting against trade and globalization.

Globalization has been a huge success in some places (Japan, Korea, China, Panama, India, Brazil) in the developed world. Global living standards how never been higher and the number of people in poverty, lower.  A remarkable 1.5 billion people have transitioned from poverty to lower middle class in a generation.

Branko Milanovic has done some great work documenting the winners and losers over the past 20 years. Here is a link to an article from the world bank about his work. 

But that transfer of wealth did not come for free. There was no magical growth pill or free lunch. It came at the crushing expense of the poor and middle class in developed countries. Through the process of immigration to developed countries, offshore manufacturing and outsourcing services to low-wage countries; large chunks of the economy were dismantled.

The chart below shows the global winners and losers for the past 20 years. (Source: Branko Milanovic)

The good news is that UK referendum on leaving the European Union opens a huge space to discuss economic inequality in the US and developed countries. This country seems ready to discuss class differences without the smokescreen of immigration and white male privilege.  We are open to having a discussion (negotiation) on how to fairly allocate the bounty of our country.

We don’t have to tell you that Black, Latino/Hispanic and poor people have also suffered tremendously under increased immigration, outsourcing and poor job prospects. Rich whites and elites were unconcerned to the plight of Blacks because it did not affect them. Now that the White middle class is starting to feel the pain of zero wage growth and poor job prospects, we may see progress on changing the economic and political system to benefit more Americans.

The future may look like Japan

One developed country with few trade problems is Japan.  Japan is highly nationalistic.  They don’t buy foreign goods. They are intensely focused on exports. They have consistently run a trade surplus for years.   Japan is also completely closed to immigration. There are limited work visas. Corporations must instead re- train workers for new positions.  Japan also promotes job security as national priority.  Corporations are not overly concerned with profits or shareholder returns. A complex web of corporate holdings limits the power of shareholders. 

Japan also has zero population growth. Japan spends very little on national defense.  Interestingly, Japan is also racist and xenophobic by our standards.  But Japan policies work.  They have the lowest level of inequality of all G20 nations.


Politicians and decision makers can no longer ignore the victims of globalization.  The are angry and they vote.

Of related news, the UK Mirror says that 67% of UK Asian voters and 73% of Black voters chose “Remain”.

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