Is there a link between globalisation and the rise of populism? What does this tell us about the outlook for financial markets? See our slideshow below.
We live in an era of globalisation. And increased income inequality.
Are the two linked? And are they the driver behind the rise of populist parties in Europe, the election of President Trump, Brexit?
In Populism and the Threat to Globalisation, we explore these issues alongside the social and cultural changes that happened in tandem.
We consider what this means for the future of globalisation and for markets.
Global trade and global growth
Trade barriers have been trending lower since 23 countries signed the General Agreement on Tariffs and Trade (GATT) in 1984.
The formation of the World Trade Organization (WTO), with 134 signatories, marked a step change in the management of global trade.
Trade barriers have continued to fall as countries and regions signed regional trade agreements.
Globalisation beyond trade
Globalisation has many dimensions.
Beyond trade we have seen financial, knowledge and cultural integration.
Globalisation and global manufacturing activity
Lower barriers to trade have led to a reorientation of global manufacturing activity...
...shifting from the developed world to the emerging world and, in particular, China.
The paradox of inequality
1st set of losers 1st set of winners 2nd set of losers 2nd set of winners
The era of globalisation has seen a dramatic decline in global poverty.
But the benefits have not been equally shared. There have been two sets of winners and two sets of losers.
The first winners have been those in the middle of the global distribution of income: in particular, factory workers in the emerging world.
The second set of winners is the so-called ‘one percent’, the owners of capital and highly educated workers with skills in global demand.
The first losers are the world’s poorest, who live in countries isolated from the benefits of a more globalised world.
The second set of losers is the middle income workers in advanced economies, whose jobs have been downgraded or disappeared due to globalisation and technological change.
Middle Class jobs
The perception among the losers in the advanced world is that globalisation has been behind the hollowing out of the middle class.
The reality is that greater labour market flexibility, the deepening of financial markets and technological advances have been more important...
...but globalisation has played a role, and a larger role than most economists had expected.
Financial crisis as a catalyst for change
Before the crisis, increased inequality was seen as an acceptable price to pay for stronger economic growth.
Since the crisis, first rising unemployment then stagnant wage growth helped to highlight the difference between winners and losers.
The rise of populist parties
The financial crisis combined with social and demographic changes already underway to provide the perfect storm for mainstream politicians.
The rising share of the vote for populist parties has notably been driven by whites without a college degree.
Arguably, no group of people has seen a greater loss of relative economic and social status over the past few decades.
Social and cultural differences played as much of a part in the election of President Trump as the economic story.
Is globalisation under threat? Will populism increase?
The inter-war period saw protectionist policies introduced, triggering a halving of world trade between 1929 and 1937. The lessons are well understood in policy circles.
But many of the social and political shifts behind populism are expected to continue, with technology – robots and artificial intelligence – maintaining the pressure on middle income workers.
A reverse in globalisation would almost certainly weigh on economic and productivity growth.
Globalisation, corporate profits and investor implications
Investors have become used to corporate profits growing faster than GDP.
An ever-increasing share of the pie for corporates at the expense of workers is unsustainable.
As a society, we must put in place policies that can sustain the benefits of a more globalised world.
As investors, we must also be prepared for the risks of a more negative outcome.
For our full analysis, read Populism and the Threat to Globalisation.
The opinions expressed are those of Standard Life Investments as at the date of publication and are subject to change at any time due to changes in market or economic conditions.