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International relations

Tide rising against globalization

HONG KONG -- Ed Hyman,a noted economist and chairman of U.S. investment research firm Evercore ISI, warned his clients in the world last Monday that the Brexit would create a market panic similar to what was experienced after the 2008 Lehman Brothers collapse.

Hyman's prediction came true on Friday. Financial markets across Asia, which were keenly following news as votes were being counted, jolted like it was another "once-in-a-century event" as the 2008 financial crisis was called. Flight to safety shot up the yen, which in turn smashed the benchmark 225-issue Nikkei Stock Average down over 8%. Hong Kong's Hang Seng index tumbled more than 5%, while South Korea's Kospi was also down nearly as much. The shock is certain to spread to European and U.S. markets as they open later in the day.

What is now of particular interest is the Kospi index. Hyman calls it "Dr. Kospi" and sees it as a leading indicator of the global economy. South Korea is an export economy, whose exports make up over 40% of the gross domestic product. The country's benchmark stock index is a mirror of the global economy.

The suffering of the gauge suggests Brexit will likely bring a headwind to the global economy. This month, the International Monetary Fund estimated that GDP of a post-Brexit U.K. would be 5.6% smaller in 2019 than a U.K. within the EU. Also, the IMF projected, other EU member countries would suffer a 0.2-0.5% dent in their respective GDP figures in 2018 if the U.K. were to leave the union. The impact of Brexit will spread to the U.S. and Asia, and could be amplified by market routs and subsequent downward pressure on corporate and consumer confidence.

Investors are not just worried about Britain exiting the EU. Around the world, and simultaneously, events that seem to echo a growing sentiment against globalization have emerged. This is a larger risk than just Brexit.

In the U.S. presidential election, both Donald Trump and Hillary Clinton, the presumptive presidential nominees for the Republican and Democratic parties, respectively, are calling for a re-examination of the sweeping Trans-Pacific Partnership trade deal agreed to last autumn.

Trump is especially radical. His election promises include building a wall along the U.S.-Mexican border at the Mexican government's expense to stop illegal immigration into the U.S.

Inward-looking sentiment is also surfacing in Europe. The refugee crisis, in which larger numbers of asylum seekers have been streaming into Europe, has bolstered nationalistic sentiment in various countries.

Many have suggested that the Brexit would further fuel independence movements in Scotland and Spain's Catalonia region, although the Scottish voted to remain inside the U.K.in a referendum last year.

What lies beneath all these developments is the global economy still stagnating eight years after the Lehman shock. History has shown that tough economic conditions inflame people's frustration and drive nations toward inward-looking policies, such as protectionism.

History also teaches us how dangerous such a social trend could be. Protectionism will keep cheap goods and services from entering and lower inflation and productivity. If the economy deteriorates further, there will be temptation to introduce another protectionist measure, falling into a vicious cycle.

We know the chain reaction that began with the rise of protectionism following the Great Depression in the 1930s eventually led to World War II.

The commotion in Europe over Brexit have not appeared so serious from halfway across the globe in Asia.

"Brexit could create short-term volatility for the global market but the impact on China is minimal," said Raymond Ma, portfolio manager at Fidelity International last Monday. "China's companies also have their own growth drivers."

But we saw similar optimism in the lead-up to the Lehman crisis. In around 2006, as the U.S. economy started suffering from a downturn in the housing market, many suggested that a "decoupled" global economy would do just fine even if the U.S. economy stumbles because growth among emerging economies would provide enough support.

We all know how wrong those people were. Two years later, the Lehman shock obliterated optimistic views as it brought on a global recession.

"There will be more separatist movements everywhere. You should be worried," Jim Rogers, a renowned American investor who now resides in Singapore has said, expressing his concern that too many people are misreading the true meaning of Brexit and buying into careless optimism before the referendum.

Rogers has this warning to the world: "History shows us that most people do not learn from history."

Nikkei Asian Review staff writer Jennifer Lo in Hong Kong contributed to this story

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