Dani Rodrik
The Globalization Paradox

Prepared by Michael Marien, Director

February 2011

argaiv1708

 

globalization-paradox
The Globalization Paradox: Democracy and the Future of the World Economy. Dani Rodrik (Prof of International Political Economy, Harvard U).
NY: W. W. Norton, Feb 2011, 346p, $26.95.

 

Author of Has Globalization Gone Too Far? (1997) and One Economics, Many Recipes (2007) confesses that he was oblivious to the crisis brewing in the financial markets of Asia of the 1990s, and points to many others who missed the recent financial crisis. “These crises transpired not because they were unpredictable, but because they were unpredicted. Economists (and those who listen to them) had become overconfident in their preferred narrative of the moment…hubris creates blind spots.” Many were “too ready to believe that prudential regulations and central bank policies had erected sufficiently strong barriers against financial panics and meltdowns in the advanced economies.” Our basic narrative has lost its credibility and appeal: “we need a new narrative to shape the next stage of globalization.” Developing nations have always complained that the system is biased against them, but the big news in recent years is that the rich countries are no longer happy with the rules either. The dismay has also begun to show up in an expanding list of mainstream economists who now question globalization’s supposed virtues.

 

The Alternative View.  The alternative narrative is based on two simple ideas: 1) markets and governments are complements, not substitutes (markets work best where states are strong); 2) capitalism does not come with a unique model (prosperity and stability can be achieved through different combinations of institutional arrangements, and nations should make varying choices depending on their needs and values.) These ideas have enormous implications for globalization and for democracy, and for how far we can take each in the presence of the other. The fundamental political trilemma of the world economy is that we cannot simultaneously pursue democracy, national determination, and economic globalization. There are too many differences among nation states for their needs and preferences to be accommodated within common rules and institutions. Hyperglobalization is incompatible with democracy. But this is not the end of globalization: the ultimate paradox of globalization is that reempowering national democracies will place the world economy on a safer, healthier footing. A thin layer of international rules that leaves substantial room for maneuver by national governments is a better and smarter globalization.

 

Some Chapter Topics:

The Rise and Fall of the First Great Globalization. The gold standard era came to an abrupt end in 1914, and we could witness a similar global economic breakdown today. Our current economic globalization rests on “shaky pillars” because global markets suffer from weak governance and are prone to instability and inefficiency.

Problems of Free Trade. The real case for trade is subtle and depends heavily on context; free trade is not the natural order of things. The analytical minds of economists “turn into mush when they talk about trade policy in the real world.” Their arguments that free trade will make most people better off are not thought through with any rigor.

Financial Globalization Follies. On the dissolution of the post-WWII Bretton Woods consensus. With fixed exchange rates and capital controls gone, two key planks of the original consensus have been shelved. Theories asserting financial market efficiency became the dominant intellectual doctrine, but were based on implausible assumptions. Global regulations and standards are an ineffective patchwork, and crisis response remains ad hoc.

Foxes and Hedgehogs of Finance. In a famous 1953 essay, philosopher Isaiah Berlin distinguished between two types of thinkers: the fox who knows many things and is skeptical of grand theories, and the hedgehog who knows one big thing. In economics, the hedgehogs think freeing up markets is always the right solution, while foxes believe real world complications require a far more cautious approach sensitive to context. “The world is better served by syncretic economists and policy makers who can hold multiple ideas in their heads.”

Is Global Governance Feasible and Desirable? There is much that is attractive in ideas about the potential for global governance. The EU experiment shows both the potential and the limitations of these ideas. We are tempted to seek global standards by which all countries would have to abide: core labor standards, banking regulations, uniform product codes. We are gravitating toward this kind of approach, but obvious limits remain. “Fair trade” labels seem like a win-win, but benefits do not necessarily go to the poor. 

 

Designing Capitalism 3.0.  Just as Adam Smith’s lean capitalism (Capitalism 1.0) was transformed into Keynes’s mixed economy (Capitalism 2.0), we need to contemplate a transition from the national version of the mixed economy to its global counterpart. But capitalism 3.0 is not an extension of the Capitalism 2.0 logic, because “the global governance option is a dead end for the vast majority of nations, at least for the foreseeable future. It is neither practical nor even desirable.” It is a fool’s errand. Seven “Principles for a New Globalization are offered,” such as markets deeply embedded in systems of governance, many ways to prosperity, the right of countries to protect their institutions and regulations (but not to impose their institutions on others), managing the interface among national institutions (a completely decentralized free-for-all would not benefit anyone), and the primacy of democratic decision making. However, genuine “global commons” issues such as addressing climate change requires international cooperation and coordination.

 

A Sane Globalization.  The principles proposed above are focused on four key areas where the challenges are concentrated:

Reforming the International Trade Regime. The current trade strategy, the Doha Round centered on trade agreements to open markets, wastes a lot of political and negotiating capital for the prospect of meager economic gains, and neglects the system’s major defect: lack of widespread support among ordinary people. The Doha Round was launched in 2001 and has experienced one collapse after another, exemplifying the problems of a low-return, high-cost strategy. “Re-empowering national democracies is a precondition for an open world economy, not an obstacle to it.”

Regulating Global Finance. A new global financial order must have a minimal set of international guidelines with limited international coordination. It should involve an improved IMF with increased resources and a larger voice for developing nations, and a small global tax on financial transactions (say 0.1%) to address global challenges such as climate change. But responsibility for regulation would rest at the national level: when a financial firm does business in our economy, it should comply with our regulations. This would democratize regulation and reduce the influence of technocrats.

Reaping Benefits of Global Labor Flows. Problems in international trade and finance stem from too much globalization, improperly managed. In contrast, “the world’s labor markets could potentially provide huge benefits, especially to the world’s poor,” and are not globalized nearly enough. Even a minor liberalization of rich country restrictions on use of foreign workers would produce a large impact on global incomes. “Labor markets are the unexploited frontier of globalization.” A temporary work visa scheme with clear carrots and sticks is proposed that would produce a gain of $360 billion/year for the world economy—much more than any agreement to remove all remaining tariffs and subsidies in global trade in goods.

Accommodating China in the World Economy. “China was globalization’s greatest success story during the last quarter century; yet it may prove to be the reason for its downfall during the next.” Few nations have institutions as idiosyncratic as China’s or leave as large a footprint on the world marketplace. China and its trade partners have become embroiled in a growing number of trade disputes in recent years. The greatest threat in the near term is China’s trade imbalance, and a major political backlash is a real possibility. But the best way to respond is not through tighter international rules and coordination. The right approach is to leave China and all emerging nations free to pursue their own growth policies. But they have to allow rich nations to have their policy space as well, under global rules that respect diversity and minimal international fetters. It would then be reasonable to expect that China will pursue currency, financial, and macroeconomic policies that do not generate large trade imbalances.

 

NOTE: Written for a general audience by a knowledgeable “foxy” economist who is critical of fellow economists with a simplistic “hedgehog” approach based on unsupported assumptions. The paradigm change proposed here is subtle and counter-intuitive (essentially saying that less ambitious globalization is better), and variously described as “a new narrative,” an “alternative narrative,” “Capitalism 3.0,” “a sane globalization,” and “smart globalization.” How we view the global economy is very important to all of us. This well-argued book offers much-needed clarification. For other proposed paradigm changes that may be relevant, see the GFB Update newsletter for February.

 
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