Dissecting Brexit: a personal view

Dr Chandra Thapa’s research and teaching interest is in International Finance. One of his class topics is whether the European Economic Monetary Union (EMU) is an optimum arrangement. Here, Chandra gives his personal view on Brexit.

The core idea of an economic union is to create a single unified market where there is free movement of goods, services, capital and labour - what is popularly termed as globalisation. When frictions like tariffs, transaction costs, quotas, taxes and so on, are in place it creates costs which reduce the optimal and efficient benefits of economic gains. As such, sovereign nations unite and negotiate to remove such costs which ensure that the expected economic benefits accrue to their citizens. This is the economic argument of a single market.

However, when country-specific politics, as an additional friction, are included in the equation and there is unfair distribution of the economic bonuses, the entire model is disrupted. This is exactly what has unfolded with the result of ‘Brexit’.

It is my belief that United Kingdom significantly benefits more from, than bearing the costs of, being in a single market.

Nothing is more important for a person than economic security and to provide a decent living standard to his or her family. Economic security depends on an amicable economic environment where businesses, which create employment, have a secure and stable environment in which to invest and hire. Investment and hiring is at the heart of providing economic security. The business community was not expecting the Brexit result. This political shock has severely dented the sentiments of the business community, particularly that of foreign investors, and has detrimentally affected their appetite to invest and hire. However, why was this message of economic security not disseminated to voters?

A great part of the United Kingdom, particularly the northern part of England, did not optimally benefit from the distribution of economic benefits arising from the process of globalisation. When they compare their relatively lower economic standards with that of their southern counterparts, they are frustrated and feel left behind by this process of global economic and financial integration.

Immigration was seen as the cause of such disparity, fuelled by some extreme political elements. Further, it is known that votes are rarely won by projecting only the risks and abstaining from highlighting the benefits – in this case, of the free market and a globalised economy. What’s more, the net effect of globalisation is not the culprit; rather, it is the disproportionate distribution of the economic benefits that is the predominant villain here. Now, it’s a monumental challenge for the politicians to change the views of the voters and pursue policies for fair distribution of wealth created by free market economy.

There is very little disagreement that the United Kingdom needs to be an outward looking country providing a safe and stable economic environment to businesses creating all the economic (but fair) opportunities for all our citizens.

The EU is not only a very big single market but we also need to keep in mind that it’s a market with higher purchasing power relative to other middle income countries like China. Further, services are the biggest chunk of our economy which can be more productively traded with economies that exhibit a greater appetite to use them.

In summary, we will most probably need full access to the single EU market, including gaining full admittance to its financial passport. On the other hand, politicians need to manage the economy’s capacity to deal with the flow of labour across borders, which I believe should be moderated as other EU countries’ economic plight improves but this idea needs to be clearly and positively explained to the public.