In the book The Power of Creative Destruction, its authors (Aghion, Antonin and Bunel) warn of the risk of forecasting past economic growth into the future: "These things cannot be measured with a straight line on a graph. Let me explain: if in the 19th century the growth line had been taken as a reference, then the most powerful capital in the world would have been Buenos Aires, because in 1890 Argentina was very rich, something it was no longer in 1990". In between, a country encounters populism (the Roman Empire of the third century is another example, or the Spain that acclaimed the ineffable Ferdinand VII in 1815). With populism, the supposed progressions break and break down.
In our article a month ago we detailed how academic research ("Populist leaders and the economy", Universities of Bonn and Cologne, 2020) showed that populist governments produced the following effects: (a) they did not improve inequality, (b) they worsened after fifteen years the progression of per capita income by 10% compared to a non-populist counterfactual, (c) they generated the same outcomes (or anti-outcomes) regardless of whether it was a right-wing or left-wing populist government, and (d) they tended to last five-six years, compared to three of a conventional government.
Analyzing "right-wing populism" let us contemplate these considerations on a concrete example: the United Kingdom's decision to leave the European Union, taken after a close referendum in 2016.
- British faced, then and now, intense problems rooted in many societies such as greater geographical inequality favoring the capital over the rest of the populations, greater income inequality and greater wealth inequality. these problems present very complex causes and solutions associated with the fourth industrial revolution. However, the population was summoned to the polls with an unequivocal appeal by the supporters of the "Brexit". The problems were "magically solved" with a simple decision: to leave the European Union, the cause of all the ills.
Let's look at the results a few years later (points 1, 2, 4, and 5 were pointed out by Financial Times columnist Chris Giles last November 30):
- First: Real wages (net of inflation) have fallen in a relevant way, from a pre-Brexit growth of 2.5% to a decline of around -0.5% in 2017-18 (3% drop) according to the Resolution Foundation. In other words, the British have been impoverished by £870 per household, net of inflation. Moreover, productivity has slowed its already mediocre growth, performing worse than that of other advanced countries. The consequence, according to the Office of Budget Responsibility (equivalent to our AIReF), is that the economy will evolve 4% worse than if Brexit had not occurred (different studies place the long-term "damage" between 2% and 10% of GDP).
- Second: Since the referendum, the pound sterling has lost 12% of its value against a basket of currencies of countries that trade with the United Kingdom (the depreciation against the dollar has been 19%). This factor has generated more inflation in the UK than in its competitors, weighing down its competitiveness. And because the British and Germans like to compare themselves, the differential between the size of Germany's GDP and that of the UK has widened by 4% of GDP since Brexit, not narrowed.
- Third: The weight of the state, measured as expenditure over GDP, has risen by 5%, despite conservative governments theoretically having promised the opposite.
- Fourth: UK trade with the rest of the world, measured as exports over GDP, has fallen by 1%, in the face of promises of a "global Britain" that was going to trade more, not less.
- Fifth: Business investment measured as a % of GDP has fallen as it has faced higher capital costs, contrary to the promise that severing ties with Europe would allow greater flexibility and dynamism in the business sector. Lower investment results in lower growth.
- Sixth: Paris has overtaken London as the main stock market in terms of capitalization.
- Seventh: Immigration, far from being controlled, has skyrocketed. If some 250,000 net immigrants were arriving in the United Kingdom before Brexit, mostly Europeans, now twice as many are arriving (gross, 1.1 million immigrants compared to 560,000 before Brexit), mostly non-Europeans, in the face of the promise to "get back in control of our borders".
Given the situation, it is not surprising that a majority of Britons today support the Bregret, as 55% regret the decision taken (source, YouGov, quoted by Bloomberg on November 28). But it is too late: the damage of populism has already been done, and as always, the impoverishment generated will mainly affect the poorest. Paradoxically, the management of this disaster will possibly lead to the Conservatives being defeated at the hands of Labour in the next general election, and that in the medium term a Labour government, even if it does not formally consider a new accession to the EU, will consider asking again for the entry of the United Kingdom into the single market, in order to reduce the intense economic ills caused by Brexit.
Aristotle says that "lies win games, but truth wins the game". It is in our hands to know and spread the truth so that populism wins fewer and fewer games and ends up losing the game.
Ignacio de la Torre
Chief Economist, Arcano Partners
https://arcanopartners.com/en/
Published in Expansión