This year will be remembered as the year in which globalization and liberalization made their come-back to the big stage of public discussion. Politics in many countries have seen alignment in messaging between representatives of the political left and -right in fighting against globalization (which must feel very awkward for them). Any newspaper considering itself worthy to read, published comments on the topic - as well as on Neoliberalism as a whole (which, as a term, has different meanings but essentially describes the economical foundations of today's free-markets).

It seems though that opponents of globalization and free trade ignore the benefits these policies have brought to our lives in the past 70 years when spreading their message. While advocates brush over the downsides and risks associated with it, and don't acknowledge the need for adaptation to improve the outcomes further.

While global economic integration has had enormous positives effects on many people's standards of living, there are certain aspects that did not have the desired outcome. In a paper on Neoliberalism, IMF Economists identified free movement of capital between countries (financial openness, or capital account liberalization) and unnecessary fiscal consolidation (overplayed austerity) as two key issues. Both are part of the neoliberal agenda, and both have been connected with the increasing income inequality that we experienced all over the world.

Capital account liberalization (free movement of capital) plays an important role in the global economy, because it allows to allocate savings to where they are most productive. However, in addition to this type of "productive capital flow", there are other capital flows (e.g. pure financial investments) as well. This distinction is important, because the productive type, such as FDI (Foreign Direct Investment) is associated with positive impacts on economic growth, e.g. through technology transfer and human capital investments. The other flows, however, seem to have no positive impact on economic growth, but rather increase the risk of financial distress within the economy - hence increasing the chances of a financial crisis to occur.

This increase in economic volatility from financial crises in turn fuels inequality, as proven by two other economists of the IMF. In countries with limited financial inclusiveness, the unequal access to credit in times of crisis is directly impacting inequality. Additionally, the impact of recessions frequently experienced after financial crises is disproportionately higher on the lower income class.

The economic policies of the past, associated with increase in inequality, have left many people behind. Their anger and disappointment shows in the political discourse we have in many countries today. But we should beware from throwing the baby out with the bathwater. Governments and politicians should directly address inequality,for example with more investments in education and better programs for unemployed to return to the workforce. Just as important are policies to avoid surges in "bad" capital flows, which will only be possible to put in place in global coordination.

It is not only dangerous, to condemn and abandon globalization and free trade. It will also not help improving the situation.

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Please share your comments and feedback (via comment function, twitter, e-mail, etc.). In my short write-ups I address topics that I am particularly interested in because they align with my values and beliefs. As such, they are always a reflection of my ideas, thoughts, and opinions. The only thing I am positive in that regard is that I do not have all the perspectives, all the knowledge, or all the facts - help me be better tomorrow.