Local Communities Are Driving Global Politics

Why have we not reacted more effectively to the economic disruption? I would argue there are two related reasons. First, the effects of trade and technological change have been experienced unevenly within industrial countries: some communities have been hit hard while the centers of governance, such as capital cities, have escaped largely unscathed and perhaps have even benefited economically. Much of Washington, DC, is booming, and people there do not come face to face with the hollowing out of towns such as Granite City, Illinois, in the US midwest; nor do Londoners see what is happening in Hartlepool in northeast England.

Second, the spread of markets and government has also weakened communities and their ability to react to change. As markets have expanded across countries and the world, government functions, too, have centralized, in an attempt to provide uniform regulations and a level playing field to market participants. Somewhat contrary to traditional views on the left or the right, markets and government are symbiotic, feeding on each other.

For instance, in many countries, transactions that used to be done entirely within a local community, and that were governed by that community, have now moved into more-anonymous markets, governed and regulated by an arm’s-length government. As a result, people have more and often better choices. Neighbors used to midwife a new baby into the world, and still do so in poor, underdeveloped communities—but in the developed world, most women give birth in a professional hospital, attended by medical personnel they will probably never see again. They trust the hospital because it is well regulated by agencies of the government, and the delivery is probably much safer as a result.

The local community, however, is diminished. The social ties between members of the community are no longer fortified by economic interactions. The supplanting of Main Street shops, first by big-box stores, and then by online stores, continues this erosion of the role of the local community in economic transactions. Television and the internet push us further into our personal cocoons. Furthermore, political power and financing has moved out of the community into state capitals, national capitals, and even international centers.

All this would not matter if the local community were irrelevant today. However, for people to be willing to participate in the market, some community functions continue to be essential. People need to be equipped with the education, skills, and attitudes that will help them be successful in their jobs. They also need a safety net that protects them against destitution when they are unsuccessful.

There are good reasons for the government to undertake these functions, but that still leaves important work for the community to do. Unlike the market, which relies on explicit arm’s-length contracts requiring an equal exchange of value, or the government, which is bound by a constitution and rules, the community is more flexible, and its actions are determined by empathy and social ties. According to the economic theory of incomplete contracts, which won its proponents—Harvard’s Oliver D. Hart and MIT’s Bengt Holmstrom—the Nobel Memorial Prize in Economic Sciences in 2016, a strong community will fill in the holes left by the market or the government. For example, it will nurture children before they are of school-going age (which, Nobel laureate James Heckman of the University of Chicago shows, can make them for life), monitor teaching in local schools, help teachers with additional funds for extracurricular activities where necessary, and provide mentoring and role models to put wayward kids back on track.

And when government-provided safety nets such as unemployment insurance run out, the community will become a support of last resort—in much of southern Europe, workers have endured years of unemployment without revolting only because they have moved back into the uncalculating embrace of their extended families. Robust, prosperous communities benefit their members significantly; one study finds that children in the US whose families were given vouchers to move from high-poverty housing projects to low-poverty neighborhoods when they were young had a 31 percent higher income on average in their mid-20s than their peers who did not move.

In sum, the despair we see across the industrial world is the effect of new technologies, transmitted via trade across the world, having devastated entire communities, which have little capacity to cope. When the only large local employer closes down and lays everyone off, there are few sources of economic activity left in the community, and the community disintegrates. Social ills mount, and the capable and mobile people leave. Not only does the hollowed-out, dysfunctional community that remains ensure a miserable present for its members, deteriorating schools and an eroding learning environment condemn the community’s children to a worse future in an ever more competitive world.

There is growing anger in these communities because people feel powerless and ignored, flotsam at the mercy of global waves. Unlike small towns dependent on single industries, big, dynamic cities—which is where the government and the governing elite are located—have been buoyed by the IT revolution and trade. In Washington or San Francisco, people seemed to be largely unaware of the hostility building in the newly disadvantaged, largely rural flyover communities in the US midwest and south, until the results of the 2016 presidential elections served as a wake-up call.

In this environment, the populist nationalists offer an attractive alternative to the disintegrating local community. To alienated citizens of the majority group, they propose an exclusive nationalism—a safe, imagined community that consists of people like them, excluding migrants, minorities, feminists, and climate-change advocates. The technocratic elite are particularly despised because they have been pursuing policies that have not at all helped the disaffected.

That the elite have overlooked the problems of large segments of the population does not mean that reversing their policies will make the disaffected constituencies better off. The populist-nationalist movements advocate erecting barriers to markets—to the flow of immigrants, trade, and finance across nations. Not only will this fail to create jobs for the currently unemployable; it will create unhappy, rapidly growing minority and immigrant groups, and this will be enormously problematic in the future when the aging majority group has to rely on young members from these groups for economic and political support.

The populist nationalists and the extreme Left understand the need for reform, but they have no real answers as they resort to the politics of anger and envy. The mainstream establishment parties, unfortunately, don’t even admit to the need for change. We need better answers. Instead of making fun of people who have been hurt by change, and of the people they have elected to stick a thumb in the eyes of the elite, we have to figure out a way to draw people feeling powerless back into the mainstream so that they regain economic opportunity and social respect. It would also be appropriate to give an equal measure of attention to historically disadvantaged urban communities, such as the ones that surround the University of Chicago’s neighborhood of Hyde Park, which governments seem to have given up on. Markets are the greatest means of economic progress that man has invented, but they work best and are politically sustainable only if everyone has an ability to participate in them.

This work matters to the whole world because if rich countries turn against markets, it will destroy the ladder that poor countries have used to climb out of poverty, ultimately impoverishing rich countries too. How do we restore economic opportunity and hope to those who have neither? We all have work to do; we must try to figure out the answer.

Raghuram G. Rajan is Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. He was the 23rd governor of the Reserve Bank of India from 2013 to 2016.

This essay is adapted from Rajan’s address at the 528th Convocation at Booth this past June.