Opinion

Lessons from Brexit

Reading Time: 6 minutes

Brexit-lessonsBritain has voted to quit the European Union (EU). Membership of the EU provided free movement of goods and people across other members of the Union spread across Europe.

Jaguar cars made in Britain could be sold across Europe without any restrictions. Workers of all member countries of the EU were also allowed to work in other member countries.

This created a problem for British workers. Wages of workers in Britain were higher than in the poorer countries like Hungary and Poland.

This led to large scale migration of workers from Hungary to Britain.

One officer working for the British Government employed a Hungarian housemaid who was willing to work for lesser wages and longer hours than the British workers.

The result of this influx of workers from Hungary was that wages in Britain have declined.

British workers found they were losing jobs to immigrants hence they have voted for exiting from the EU, or Brexit.

The poorer States of Great Britain namely Northern Ireland and Scotland have voted in favour of remaining in the EU. Their position is similar to that of Hungary.

Their poorer workers do not face much competition from Hungarian workers. They have more to gain from the jobs across Europe than they have to lose to immigrants from Hungary.

Mainstream economic theory has failed. Economists regularly propounded that the gains to British businesses would lead to huge benefits to the British workers.

The logic was like this. Membership of the EU would enable British companies like Jaguar to employ cheaper immigrant workers. British businesses will become globally competitive and grow.

They will pay more taxes and those revenues would be used for increased expenditures on welfare schemes like free education and health.

Increased competitiveness of British companies will lead to the creation of larger number of highly skilled upscale jobs. In this way the growth of British businesses will trickle down to the poor.

The living experience of the British workers, however, indicated otherwise.

They found that their wages and standards of living declined while businesses made increased profits.

The battle lines were drawn. On one side were big businesses who gained. On the other side were ordinary workers who lost. Thanks to a referendum, the workers have won the day.

The media campaign unleashed by big businesses was not able to smother this reality. Tata Jaguar announced that exit from the EU would lead to increased losses for the company.

Investors like George Soros also pitched for remaining in the EU.

The British middle class also opposed Brexit. This class is concentrated in London which voted in favour of remaining in EU.

Reason is that globalization hits the ordinary workers hard and may lead to gains for skilled workers. The growth of big business has benefitted the middle class.

The final tally is like this. Majority of the people of Britain were in favour of leaving the EU because they were hit by cheaper immigrant workers. Against them, in favour of remaining in the EU, were arrayed three groups.

The poorest of people of Britain wanted to remain in EU because they got cheaper goods from rest of Europe and were not threatened by immigrant workers.

The middle class wanted to remain in EU because it got upscale jobs from the growth of big businesses.

The big businesses wanted to remain in EU because they got cheap labour and access to EU markets.

The combined weight of these three sections was yet inadequate to the stem the negative impact of EU on the majority of Britons.

The decision by the British people raises a question mark on the fundamental process of globalization. It is clear that globalization is beneficial for the Multinational Companies.

They get opportunity to manufacture, trade and sell goods across the world. But it is harmful for the workers of the better-off countries.

Their workers face competition from the less paid workers from the poorer countries.

English workers face competition from less paid workers from Hungary; and Chinese workers face competition from lesser paid workers in Vietnam.

The poorest workers from Hungary and Vietnam are the only ones to benefit.

This benefit, however, is minimal. The total numbers of workers in poor countries of the world such as Hungary and Vietnam is very large.

As a result the increase in wages of these workers due to some of the migrating to the better-off countries is negligible.

It is like the price of potatoes in the market when 200 trucks are waiting to sell their goods.

Sending 10 trucks of potatoes to far off markets does not change the price much. Similarly, the increase in wages of the workers of Hungary and Vietnam is negligible.

Thus, at the end of the day, globalization works only from the big companies; and not for the people.

There is a deep lesson in this for India. We have followed the same economic policies propounded by the World Bank that have turned the British people against globalization.

We have allowed free entry to cheap goods produced in China leading to the closure of large numbers of our small businesses.

There has been a huge influx of cheap workers from Bangladesh and Nepal especially in the border states like Assam, Bengal, UP and Uttarakhand. Indian maids in Delhi too are facing the heat.

Indian big businesses are strongly arrayed in favour of globalization just like the British big businesses. They are investing large amounts in foreign countries and buying up their businesses.

One third of inward FDI in Britain has come from India. Global businessmen like Donald George Soros and Ratan Tata stand to gain from globalization. Our middle class too stands in favour of globalization.

Large numbers of skilled middle class jobs are being created in India. Multinational Corporations are establishing software support centers and research units here.

The wages of a software engineer in India may be Rs 50k per month. A similarly skilled engineer would be paid Rs 500k per month in Britain. Yet the Aam Aadmi is not amused.

He is finding that his jobs are being taken away by imports of cheap Chinese goods and by immigration of Bangladeshi workers. Our situation is exactly like that of Britain.

Upper- and Middle classes stand in favour of globalization while Aam Aadmi stands against this policy. I daresay India too will vote against globalization if a referendum is held.

The Government must beware. Dreams of creation of jobs from Make in India that are regularly coming out from the PMO will not change the hard reality just as David Cameron’s pep talk did not change the ground reality of globalization in Britain.

Author was formerly Professor of Economics at IIM Bengaluru Author's phone: 85278-29777

Author was formerly Professor of Economics at IIM Bengaluru
Phone: 85278-29777

Bharat Jhunjhunwala

Dr. Bharat Jhunjhunwala was formerly Professor of Economics at IIM Bengaluru. Views expressed are personal. .Author’s phone: 85278-29777

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