The countries and the international community must seek a new institutional, political, and economic framework that will allow globalization to run its course and, at the same time, guarantee a stronger voice and power to local or regional communities, often neglected by federal (central) governments and the market. This challenge becomes even more urgent in the face of the economic and social crisis resulting from the COVID-19 pandemic.
"After all, it is the local and regional differences that are the basis of the feeling that we each have our own place on the planet that makes us unique."
Raghuram Rajan is a professor of finance at the University of Chicago Booth School of Business.
In this webinar, in which he presented the central thesis of his book, The Third Pillar: How Markets and the State Leave the Community Behind (2019), the Indian economist – former Chair of the Reserve Bank of India from 2013 to 2016 – was interviewed by former Finance Minister Pedro Malan (1995-2003) and by Sergio Fausto, FHC Foundation director, which held the event in partnership with CEBRI.
“In all my adult life, I have never been more concerned with the direction that humanity is heading. The novel coronavirus pandemic and the profound economic crisis it has caused make the correct balance between the federal government, the market, and the community even more significant. His most recent work describes why this relationship is unbalanced—the community being the weakest link. Can you explain to us how you came to this conclusion and what must be done to find a new balance?” the Brazilian economist asked.
“Markets are generally a good thing, and the freer they are, the better. The federal government will always have an essential role. The third pillar – the role of the local or regional community – has been losing momentum due to globalization and the emergence of global value chains, driven by the technological and communications revolution,” said the former chief economist and research director of the International Monetary Fund (2003 to 2006). “Several emerging markets benefited from this process, as they knew how to transform and export. Industrialized countries did too, but if we analyze the results in the world and within countries, what we see is a very uneven result.”
In the decades after World War II, this balance between the three pillars – the federal government, the market, and the community – resulted in the success of liberal democracies in the industrialized world: “Many of us in emerging markets try to follow the same path in order to achieve similar patterns of prosperity and stability. Unfortunately, this did not happen as we expected, and in the first two decades of the 21st century, populations from several countries began to become dissatisfied with that model. This process is partly responsible for the representative democracy crisis and the emergence of illiberal states,” explained Rajan.
‘Spatial inequality'
The expansion of globalization since the 1990s and the rapid technological and communications change – accelerated digitization, increasing automation, and the popularization of social media – are other elements of the process. “With the emergence of global production chains and factories being transferred from developed countries to the developing world, the small or medium-sized cities in rich countries have lost jobs, income, and revenue. The hardest hit were workers with an average educational level, who previously had stable jobs and reasonable wages and, suddenly, found themselves with no prospects. A similar process reached the service sector, with automation and outsourcing,” he said.
“But inhabitants of large urban centers, such as New York, São Paulo, or Mumbai, which comprise highly educated, globalized, and digitally savvy populations started to have better job opportunities and higher and higher wages, intensifying social inequality even in rich countries,” continued the speaker. This privileged urban class did better even during the pandemic, as it can work from home, safely and comfortably.
“Inequality today is not only reflected in the quality of jobs and income, but it is also spatial. It strikes communities most strongly in the suburbs or small towns whose industries or businesses have been crushed, and nothing has been put in place. Meanwhile, London, San Francisco, and Milan go from strong to stronger,” he said.
Finally, with the formation of the big economic blocs (European Union, NAFTA, and others), pressure increased for the national legislative and regulatory framework to move progressively towards supranational or even global harmonization, making it easier for corporations to operate across national borders. “The power the local loses to the national and then to the supranational is what explains, for example, Brexit (2016), a referendum in which the majority of Britons (among those who went to the polls) expressed opposition to the transfer of power to London and Brussels (EU headquarters),” he said.
According to Raghuram, a member of the Group of Thirty, central governments have been negligent or have given inadequate responses to this complex phenomenon and are partly responsible for the emergence of nationalist, protectionist, and populist movements and leaders in prominent countries around the world.
This set of factors explains how Donald Trump was elected to the White House in 2016, with promises to bring back factories and companies that have moved to developing countries (especially in Asia), review trade agreements, increase import tariffs, and limit immigration.
“It is nothing new under the sun that the US presidential election of 2016 was decided in the so-called flyover states and in the Midwest, where, in addition to the economic despair resulting from the lack of jobs, there was substantial social disintegration, with a rise in divorce, violence, and alcohol and drug abuse. Young people and families with young children have left their communities, a vicious circle in which the only way for those left behind to react is to vote. At that time, the choice was Trump,” he said.
‘Populists ask the right questions, but give wrong answers'
According to the professor and researcher, this complex process has been going on for some time, but the political leaders neglected those communities that were left behind. He criticized solutions centrally devised in the capital cities, which, in turn, "are not always the right answer to what communities really need."
As an example, he cited granting subsidies for large companies to settle outside of large cities. This was the case of Amazon.com, for example, which announced a new headquarters being created on Long Island (east coast of the USA). “Several communities in the region were opposed, as Amazon.com would attract a highly-skilled workforce (programmers and managers) but would not employ local workers who are unfamiliar with the digital world. The result would be higher rents and more competition for slots in schools,” he explained.
“Nationalist/populist leaders have brought relevant questions into the public debate and have received support for doing so, but they have the wrong answers. They will most likely replace one set of problems with another,” he said. "One of the risks of this nationalist discourse is that it constantly needs new enemies to satisfy its support base, especially on social media."
Raghuram proposed that the political and academic communities and civil society reflect on how to promote local/regional solutions that reinforce the power of communities without giving up the positive attributes of an increasingly interconnected world: “To fix this complicated situation in which we find ourselves we must emphasize the feeling of belonging to a real community without it becoming a source of alienation and isolation."
“If the central government effectively relinquishes some power and transfers decisions and resources to the local governments in an organized and useful manner, people will participate more in the solutions, however small, and democracy will become stronger.”
“Communities are the antitheses of the volatility of markets and the economy. In severely critical times, such as the one we are experiencing now all over the world, people turn to communities,” he said. He cited the mass exodus of tens of thousands of Indian workers from large cities to their villages of origin, walking hundreds of kilometers on foot after the government decreed a lockdown, as an example. “Neither the governments in Delhi or in the province capitals offer safety nets to these migrant workers who live in precarious situations. The village where they were born and grew up is the only place where they know they will be welcomed in any situation,” he said.
Technology can be an ally in this decentralization through telemedicine, distance education, and online work. “My hope is that, more and more, technology will distribute economic activity throughout the national territory, instead of concentrating it in large cities. It is essential to invest in universal and free digital inclusion for that to happen,” he concluded.
Otávio Dias is a journalist specializing in politics and international affairs. A former correspondent for Folha in London and editor of the estadao.com.br website, he is currently the content editor at Fundação FHC.
Portuguese to English translation by Melissa Harkin & Todd Harkin (Harkin Translations)
