Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.

Truly Taking Back Control

CHICAGO – Britain is teetering toward Brexit. No one knows what will happen over the next few months. Yet around one-third of British voters support a “no-deal” departure from the European Union, which risks inflicting an economic disaster on the country.

Many of these “no-deal” Brexit supporters are older and modestly educated, and live in economically depressed semi-urban communities and small towns, which tend to be concentrated in northern England. Although they are anxious about the steady deterioration in their economic prospects, studies suggest that trade or even immigration are not their only concerns. Brexiteers also resent their loss of control over policy, first to a distant national capital full of well-educated global elites, and in recent years to an even more remote EU.

EU-mandated immigration rules are just the most obvious sign of their powerlessness. Brexit supporters voted to leave the EU in order to “take back control.” Unfortunately, Brexit, in whatever form it takes, may not give them what they want, fueling further resentment. Can anything be done to quell their anger?

The disempowerment of communities is not a uniquely British phenomenon. As markets expand across political borders, participants prefer a common governance structure that eliminates annoying regulatory differences and transaction costs. Historically, such integration happened within countries. As inter-regional trade and capital flows increased, demands for seamless regional borders and harmonized national regulation became louder. National governments therefore increased their powers and functions at the expense of regions and local communities.

In turn, as globalization accelerated in recent decades, national governments acceded to international agreements and treaties that limited their sovereign powers. They have also ceded some powers to international bodies. For example, the European Commission’s harmonization of economic regulations across the EU limits the regulatory discretion of individual member states. This has catalyzed movements seeking to reclaim national sovereignty, like that of the Brexiteers.

But even as power (and often funding) has moved from local to national and then international level, the effects of globalized markets and technological change have varied greatly. Strikingly, mega-cities have prospered while semi-rural communities have experienced diminishing economic activity and opportunity. The Great Recession that began in 2008 accentuated this trend, with cities bouncing back quickly while semi-rural areas languished. Such an uneven impact calls for responses that are suited to local needs and conditions. But formulating these responses is much harder when communities are disempowered.

Disempowerment causes further collateral damage. When opportunity leaves economically marginal communities, despair and social dysfunction typically set in. The number of broken families increases, as do rates of substance abuse and crime. Those who can leave move away. Far from being a source of pride and social cohesion, the community becomes a repository of collective sorrow, if not shame. And its members look to alternative sources of identity and social solidarity, including nationalism.

Populist nationalist leaders pledge to make their country “great again” by ridding it of the constraints imposed by international agreements and bodies. Of course, as they grab power back from the international arena, such leaders are tempted to resist the further devolution of power and funding to regions and communities. Instead, populist nationalists could turn more dangerously against the international system, presenting their supporters with a continuous parade of external villains to blame for their plight. This is a path that leads nowhere good.

To be sure, there are numerous other types of nationalism; many Brexiteers want Britain to remain open to trade while severely restricting immigration, for example. But as growth slows and their populations age, developed countries will need both export markets and some immigration – the first to support demand, and the second to pay for the pensions and health care of aging populations. Balkanizing the world by erecting barriers is a sure way to convert unequal prosperity today into collective poverty tomorrow.

The nationalists are right, however, that we have moved too far toward standardizing and harmonizing laws and regulations across countries. In this age of artificial intelligence, companies and traders can surely handle some national regulatory differences. Could we not bring some powers back to the country level, provided global markets remain open? Why must unelected technocrats decide the rules in closed rooms far away? The globalization of governance may be a step too far for globalization’s own good.

But Brexiteers take note: the devolution of power will not stop at the national level – as suggested by the murmurs in Scotland and Wales. Declining local communities desperately need new economic activity, while their members have to become more adaptable to globalization and technological change. This often requires local engagement and solutions, aided where necessary by national governments. Political parties could play a constructive role in restoring powers, funding, and often health to many communities.

Rebuilding a strong sense of positive community identity would likely make adversarial nationalism less appealing. At the very least, when people are more able to shape their own futures, they are less likely to be convinced that others are to blame for their plight. To the extent that it weakens support for virulent nationalism, devolution may make the world a little more prosperous – and a lot safer.

Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind

Copyright: Project Syndicate, 2019.