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Brexit: propping up the ladder

Source: Al Jazeera

In his 2003 book Kicking Away the Ladder, Ha-Joon Chang argues poorer countries are being prevented from using the same policies that rich countries used in their development. Large economic blocs such as the USA and the EU exert pressure on poorer countries through their trade policy, to prevent them from having their own industrial policy. As a result, this squanders development. If we are serious about addressing global income inequalities and reducing endemic poverty in poor countries, Britain leaving the EU could make a monumental difference.

From Britain’s perspective, there is overwhelming evidence supporting the “Remain” campaign. From a decline in foreign direct investment (FDI) due to reduced access to European markets, to losing out on the sharing of security information, for Britain it’s just not worth taking the risk. But how about the rest of the world?

How does the EU look from the perspective of the rest of the world? The EU is a political and economic union of 28 members. Together they represent 508 million people with a combined GDP of $19 trillion making it the second largest economy in the world behind China, and ahead of the USA. With income per capita of around $32,000, that’s a lot of rich people just ready to buy your goods and services.

An often quoted reason for why we should remain in the EU is the altruistic, Utopian vision of greater global integration. Integration in Europe is said to be the first step toward globalisation, allowing the free movement of people, goods and ideas for a more tolerant and peaceful world. This is a mistake. The European Union has only allowed greater economic and political integration within Europe, erecting large barriers between Europe and the rest of the world. Currently, there are few incentives for the EU to open borders with external countries freely. Poor countries desperate to sell their produce to Europe have very little bargaining power compared to the combined might of the EU, and consequently have to put more on offer.

To gain access to this market of 500 million wealthy people, poor countries must sign away their ability to: set tariffs, subsidise industry, favour national producers in policy, as well as facing many other constraints. Some may argue that this isn’t so bad, because free trade is great for everyone, right? This is where I return to Ha-Joon Chang’s book, Kicking Away the Ladder. He documents how the USA, Britain, Germany, Sweden and others, used the very same policies that the EU aggressively outlaws in these trade agreements to develop into the wealthy geopolitical leaders they are today. Opening up their economies, without the ability to protect certain industries, means that new small industries will be blown out of the market by the industry leaders that exist in European economies. Only those industries where they are most competitive will survive.

That’s OK though isn’t it? They can sell the goods and services they are good at producing into European markets and become rich, can’t they? NO. This will not make them rich. Without the ability to have industrial policy, poorer economies fail to diversify. The industries where they are competitive (often raw material extraction or low-skill manufacturing) grow, whereas potential technologically advanced companies will die in the face of European competition. They become dependent on single industries. These industries often have very few benefits to the wider economy. Take Guyana for example, a poor country in South America. They traded their policy sovereignty away in the EU-CARIFORUM Economic Partnership Agreement. Their major exports are gold (60%), rice (10%), and bauxite (10%). These are low-skill, low-tech industries, with very few benefits to the wider economy. Knowledge-based industries such as financial services and car production, dominated by companies in European countries, have large supply lines, a high demand for education and provide opportunities for innovation benefiting the wider economy.

While the EU continues to aggressively pursue such free trade agreements, these countries will remain under-developed and dependent on basic industries that have few benefits and are more prone to global price fluctuation.

What has all this got to do with Britain? The EU’s bargaining power is dependent on their market size and the wealth of its citizens. Without this, they could not ask so much of poorer countries. The UK is the second largest economy in Europe. A departure would knock 15% off the EU’s total GDP. More importantly though, it would mean 64 million wealthy people would no longer be a part of the EU. Suddenly, the EU has fewer chips at the negotiation table. With a large alternative in the UK to negotiate with, poorer countries could ensure better terms allowing them to diversify their economies and pull large swathes of their populations out of poverty.

15% does not seem much, but there could be significant knock on effects of a Brexit. Euroscepticism is rife across Western Europe. In France, Front National’s leader Marine Le Pen has been given the title: “Madame Frexit”, and leads the presidential field. Referendums on EU-related matters are not uncommon across many states in Europe and a Brexit could be the push such movements need. If more countries were to leave the EU, their strength at the negotiating table would get smaller and smaller.

As a wealthy nation, Britain could take the hit. It has experienced some of the fastest growth in the EU since the financial crash. Growth has mostly been derived from its relations with non-EU countries. Britain is competitive for non-EU reasons. For instance, the UK boasts an excellent higher education system, its own currency, physical infrastructural transport links to Europe and the USA etc. The more countries that would follow in the footsteps of a Brexit, would decrease the costs of leaving in the first place.

Opponents to this argument may point to the billions that the EU spends on aid and development assistance. However, the latest budget for 2014-2020 approved by the EU was much lower than hoped for by academics and aid agencies, and less than the 0.7% of GDP that was promised. Additionally, a political union guaranteeing aid contributions from European countries does not necessarily need to be an economic union.

Regionalism is not globalisation. The EU’s roots are in the European Economic Community that was established in 1957 and it’s no coincidence that the world’s rich list has not changed much since then. If we are serious about correcting global income inequalities, and re-balancing power between the Global North and the Global South, a weaker EU would make a monumental difference. An EU without Britain is certainly weaker, but much better for poorer countries and people in poverty.