By Andrés Velasco

Out-of-control globalisation has destroyed jobs, caused middle-class incomes to stagnate and deepened income inequality. In response, angry voters are turning to populist politicians. Without a radical shift away from liberal economic policies, populism will be unstoppable.

This narrative is simple and increasingly popular. It is also dead wrong.

Precisely because populism — whether leftist (Hugo Chávez in Venezuela, Podemos in Spain) or rightist (Donald Trump in the United States, the National Front in France) – is ugly, menacing, and destructive, its growing strength calls for nuanced explanation. A weak grasp of causes will lead to ill-conceived solutions — at which point populism truly may become unstoppable.

One problem with the emerging conventional wisdom is that it mixes three sets of factors that should be kept separate for analytical and policy purposes.

Product-market deregulation and falling trade barriers belong to what academics call microeconomics.

Destabilising international capital flows and self-defeating fiscal austerity (exhibit A: the eurozone) are part of macroeconomics.

Lower transport costs and new labour-saving technologies fall under the rubric of exogenous structural change.

Lumping all three together as globalisation only causes confusion. This confusion was evident two months ago, when the International Monetary Fund (IMF) published a piece that was greeted as the final nail in the coffin of “neoliberalism” (an empty label that can encompass whatever bugbear a critic wants to rail against on that particular day).

Yet the IMF was only saying what, at this point, is pretty obvious. Unregulated international capital movements can be destabilising. Large inflows appreciate currencies, reduce competitiveness, and destroy jobs; sudden outflows cause those appreciated currencies to crash, bankrupting local financial institutions and requiring costly bailouts at taxpayers’ expense.

Moreover, added the IMF, fiscal austerity can backfire. Cutting useful expenditures or raising distortionary taxes reduces the supply of goods. It also shrinks overall demand, which is fine when the economy is overheated, but devastating when the economy is depressed and a liquidity trap (exhibit B: the eurozone again) prevents monetary policy from doing the heavy lifting. If growth slows enough, the ratio of public debt to GDP can end up rising, despite austerity.

So macroeconomic mistakes are costly — in terms of growth, jobs, and income distribution. That’s the bad news.

The good news is that, by imposing intelligent capital controls (as Chile did in the early 1990s and other countries have done since), an economy can enjoy the benefits of free trade in goods and services with less destabilising capital mobility.

For nearly a decade, the IMF has been acknowledging that controls are a useful policy tool — a change of heart that I lauded back in 2011.

Likewise, misguided fiscal austerity is neither unavoidable nor inextricably linked to globalisation — especially the smart kind that moderates short-term capital movements. Closed economies can also have fiscal crises, and open economies can avoid them if they follow the right policies.

The key is to be Keynesian throughout the economic cycle — pursuing expansionary policies when growth is slow, and tightening to reduce public debt (and thus create room for future expansion) when activity is buoyant. Fiscal rules can help make such behaviour politically palatable.

So there is no need to throw out the baby of a liberal international economic order with the bathwater of bad macroeconomic policy.

UK Labour Party leader Jeremy Corbyn’s pathetic efforts on behalf of the “Remain” campaign ahead of the Brexit referendum, and his inability (one might say unwillingness) to confront the Brexiteers’ many untruths, is a case in point.

Economies open to foreign goods and technology can develop the tools to mitigate volatility and defend jobs. Europe, labouring under a common currency, a half-hearted banking union, and an unnecessarily tight fiscal policy, has chosen to abandon those tools. That choice was neither preordained nor one that the rest of the world should imitate.

The other problem with the conventional wisdom’s simplistic link between globalisation and populism is that it gets the timing wrong.

Whatever the causes, average wages in the US have been stagnant since the 1970s. As Daniel Gros has pointed out, the wage gap between highly educated workers and the rest has been roughly constant in Europe (and declining in the United Kingdom) over the past decade. And in countries like Belgium, France, and Spain, the unemployment rate was at or above 10 per cent for long periods in the 1980s and 1990s.

But there was no outbreak of nativist populism back then, and there is now. Why?

The answer has everything to do with politics. And politics, as former US House Speaker Tip O’Neill liked to say, is always local.

Elites in Western countries discredited themselves by permitting the financial excesses that helped trigger the Great Recession [of the 2000s] and by being slow – particularly in Europe – to deal with the social consequences.

Next, they underestimated the effect that unfettered migration and the perceived weakening of the nation-state would have on the sense of “us” – the people with whom we share a destiny and of whom we ask sacrifices (one of which is paying taxes).

Harvard’s Ricardo Hausmann has pointed out that the British choose to have four different football teams (England, Scotland, Wales, and Northern Ireland) even though having one united team might keep them from losing to tiny Iceland, as England did in the recent European Cup. No wonder, then, that — viewing the choice this way — the UK opted for Brexit.

Now Western political elites are making another mistake when — seemingly cowed by the populists — they fail to mount a full-throated defence of liberalism’s virtues.

UK Labour Party leader Jeremy Corbyn’s pathetic efforts on behalf of the “Remain” campaign ahead of the Brexit referendum, and his inability (one might say unwillingness) to confront the Brexiteers’ many untruths, is a case in point. (See “Leadership lessons from Brexit” in the August Acuity for another view.)

In the 1930s, thinkers like John Maynard Keynes and political leaders like Franklin Roosevelt, with brave and eloquent words still worth quoting, discarded capitalism’s mindless orthodoxies in order to save the liberal democratic order. One world war and tens of millions of deaths later, they succeeded.

Today, liberal democratic values are once again under siege, and the path paved by Keynes and Roosevelt is still the only way out. We should follow it.

Andrés Velasco is a former finance minister of Chile. He is currently a professor at Columbia University and has taught at Harvard University and New York University.

Copyright Project Syndicate.

This article was first published in the December 2016 issue of Acuity magazine.