A broken social contract

Tucumcari, New Mexico. Copyright Lynn Grieveson / Hive News

For the convenience of subscribers, here's my weekend column about how Brexit and the election of Donald Trump represent the sudden collapse of a social contract in favour of globalisation. Tweaks won't be enough to rebuild it.

Like any building with concrete cancer, trust in a big society-wide idea can seem very solid right up until the moment of collapse.

Ernest Hemingway captured the concept best in this exchange in his novel "The Sun also rises': 'How did you go bankrupt?' Bill asked. 'Two ways,' Mike said. 'Gradually and then suddenly.'

Trust among the general populace in the big idea of Globalisation has been ebbing away over the last 10 years or so around the Global Financial Crisis, but it never seemed like it was about to collapse -- until now.

The election of Donald Trump appears to have been that moment of collapse. Suddenly, it seems, everyone is questioning everything about a 30-year long trend towards ever-freer movement of goods, services, capital and people around an increasingly inter-connected world. Trump's first act as US President will be to tear up the next big act of globalisation -- the Trans Pacific Partnership.

This modern version of Globalisation was really kicked off in the mid-1980s with the reforms unleashed by Margaret Thatcher and then the end of communism in 1989. New Zealand's version of this was unleashed by the Lange-Douglas Government of 1984 and it has been full steam ahead ever since.

Both sides of politics and the broad populace essentially agreed on a social contract. It goes something like this: controls on imports and exports of goods, services and capital would be removed and currencies would be freed to float. This would generate an extra boost to economic growth and the benefits would be broadly shared around in the form of higher incomes, cheaper stuff and more vibrant and diverse societies. The idea was that the inevitable disruptions would be followed just as inevitably by stability in some form and a better life.

The whole idea got turbo-charged in 2001 when China joined the World Trade Organisation and became the factory of the world over the next decade. It got some nitrous oxide from a New Zealand point of view with the 2008 Free Trade Agreement, although New Zealand was not alone in feeling an acceleration of this process as China and North Asia became a lot more enmeshed in the global capital flows, tourism and migration.

The big assumption underpinning this social contract is that most people would be broadly better off because of these massive changes, and that the few who weren't better off would be somehow protected or cushioned or compensated and that it would all work out better in the end.

This question of who would actually benefit from the undoubtedly stronger economic growth created by Globalisation is a crucial one because it's now been long enough to know the answer. The jury is in in the form of the now famous 'Elephant Chart', which shows what happened to incomes along the various parts of the global income spectrum between 1988 and 2008. The chart produced by World Bank Economist Branko Milanovic shows real incomes for poor people in emerging countries such as China rose 60-80%, as did incomes for the richest 2% of the globe. However, the poor-to-middle income groups of America and Europe have not benefited much at all, or in some cases went backward. Milanovic calculates that more than half of the actual gains in dollar terms (not percentage terms) of the economic growth of that period went to the richest 5% of the world's population.

The big assumption at the beginning of Globalisation was that a rising tide would lift all boats reasonably evenly. That didn't happen for large parts of the developed world. The world is demonstrably better off overall, and hundreds of millions of people were lifted out of poverty in Asia and Eastern Europe, but big chunks of the population in the developed democracies of the world missed out, or worse.

Now these people in the provinces and the rust belts of northern England, industrial old Europe and the Mid-West of America are revolting. The Global Financial Crisis was the first sign that something was wrong in the bowels of the globalisation process and the reaction of central banks and Governments simply confirmed the unfairness and flaws in the system for people who were already sceptical. Bankers were bailed out and given bonuses while benefits for Globalisation's losers were cut.

Not everyone believes or feels this, but New Zealand has actually done a much better job of cushioning the blows of globalisation and spreading the benefits around than America in particular, or even Britain and Europe. But the same erosion of trust is happening here, even if there is no collapse yet. New Zealand First's poll ratings are an obvious sign, along with the changing stances of other politicians closer to the centre who can sense the cracks appearing in the edifice and can feel the ground rumbling underneath them.

The default position for many now is to distrust apparently rootless multinational companies who have played countries off against each other to reduce their tax bills and generate ever-bigger profits for their equally rootless investors.

Prime Minister John Key has his ear close to the ground and this week he told the ultimate face of rootless cloud-based globalism, Facebook founder Mark Zuckerberg, to win back the trust of the globalised masses by paying its taxes.

"There's a bit of a feeling - that would have got Donald Trump elected - that somehow the world wasn't fair," Mr Key said, adding Mr Zuckerberg needed to demonstrate Facebook was paying its fair share of taxes in every country.

"I think if they don't, the same people who are its users will wake up one day and say 'why do I have to pay my tax if this company is not going to.'"

It's a bit late for that now. People are wide awake. Mr Key hopes that the social contract supporting Globalisation in New Zealand is not broken and can be repaired with a few tweaks and some good PR. The trouble is Globalisation is truly global. It only works when everyone globally believes in that social contract, and that is broken.

President-elect Trump is now acting to carry out the wishes of the rural, less educated, former factory workers of the Mid-West to tear up that contract. Brexit voters did the same. Italy, France and Germany are set for elections in the next year that also be votes of confidence the European version of Globalisation. For many who benefited from Globalisation, this shock seemed to come out of the clear blue sky, but it shouldn't have been.

The pressure has been building for years. First, support for the Globalisation contract collapsed gradually in the years since 2008, and then in 2016 it collapsed suddenly with Brexit and Trump.