on February 13, 2011
Every student in economics is familiar with Robert Mundell's triangle of impossibility. Based on the model that the Canadian economist developed with Marcus Flemming in 1962, this trilemma states that it is impossible to have a sovereign monetary policy, free capital flows, and a fixed exchange rate at the same time--that two, and only two, of these objectives could be met. This impossible trinity came to dominate policy debates in Europe in the run-up to the European monetary union in the 1990s--a rare example when the result of a theoretical model had a direct bearing on policy choices.
Although he doesn't develop a formal model, Dani Rodrik offers his own, more ambitious version of the impossibility triangle. The political trilemma of the world economy, as he names it, is that we cannot have deep economic integration ("hyperglobalization"), national sovereignty, and democratic politics at the same time. We have to sacrifice one of the corners of the triangle. And for Rodrik, the objective that has to be abandoned is clear and straightforward. We cannot compromise on democracy, and global governance is nothing but a distant dream. We therefore have to jettison hyperglobalization in favor of a more shallow form of global economic integration, a new version of the compromise that was embodied in the postwar system laid out at Bretton Woods. In particular, unrestricted capital mobility and indiscriminate trade openness will have to go. This will make the world a safer and better place for democracy.
Dani Rodrik, who teaches at Harvard's Kennedy School of Government, is a first-class economist. In academic and policy circles, people talk about him with respect and sometimes even with awe--it is better to have him on the same side of an argument than sitting across the table. Some economists perfidly point out that he has a talent for bending numbers to support his claims-- that he is an expert in the art of political econometrics, or the use of statistical regressions to support one's political positions. But this is how the game of economics ought to be played. Although Rodrik is sometimes considered as a maverick and a lone wolf, he speaks from inside the tent. No one would put into question his qualification as an economist. Sure enough, his arguments are often controversial and even provocative, but they are receivable and debatable by the academic community. "He is one of us", most if not all economists would acknowledge.
This is why his criticism of globalization ought be read with great attention and interest. It comes at a time when the high hopes invested in globalization have receded, and the negative aspects brought about by open borders and financial liberalization now take center stage. At this juncture, as Rodrik underscores, we need a new narrative to shape the next stage of globalization. "Economists have been responsible for the narratives that interpret development success and failure, narratives which in turn have guided policy in many parts of the world." They now have a special responsibility for shaping the debate: because they have been the cheerleaders of the previous phase of global openness, and because they can help distinguish snake oil from real ointments, and separate "the legitimate wheat from the 'protectionist' chaff".
Many prominent economists are now starting to have second thoughts on globalization. True, their choir was never at unison: some had different pitches, and their endorsement of free and open markets often came with caveats and restrictions. Even a staunch free-trader like Jagdish Baghwati expressed warnings about unrestricted capital mobility. Now more voices are beginning to worry about the consequences of deindustrialization, the growth of inequality, and the race to bottom standards and regulations brought about the current wave of globalization in developed economies. As Keynes once famously remarked, "When the facts change, I change my mind--what do you do, sir?" Rodrik, for one, never changed his mind on trade liberalization. He was one of the first economists to bring the debate from the seminar room to the political arena, and to argue against the simplistic case for free trade that is often doled out to journalists to supports claims about the benefits of globalization. He comments the matter with considerable talent and great humor--never was a class discussion on comparative advantage and international trade theory so lively and refreshing.
Dani Rodrik doesn't limit his argument to modern textbook economics. He excavates from the dusty shelves of economics libraries some forgotten books and tracts that are singularly relevant for today. Henry Martyn's Consideration Upon the East-India Trade, written in 1701, anticipates many of the arguments that economists who favored free trade would marshal much later. In 1961, James E. Mead wrote The Economics and Social Structure of Mauritius, and proposed the same kind of diagnostic tools and policy approach that Rodrik and his coauthors would later develop and sell out to the World Bank. This approach, called the "Growth Diagnostics framework", now serves as reference in international policy debates and is quoted approvingly by senior officials from emerging countries who are now the darlings of international gatherings. Development economics has come full circle: as Rodrik notes, "that industrial policy, in whatever guise, is once again considered acceptable, and indeed necessary, speaks volumes about how far we have retreated from the trade fundamentalism of the 1990s."
Rodrik also have his weak points. He is candid about his limitations as a forecaster. He didn't see the Asian crisis coming in 1997, and he got it wrong again in 2007 when he missed the subprime crisis that was brewing in the U.S. More to the point, he picked up the wrong fight in the late 1990s, arguing against free trade when the real menace was coming from the excesses of financial globalization. One gets the feeling he still gives too much importance to the trade agenda as defined by the WTO in comparison to the new trade rules and conditions negotiated away from public scrutiny in the bilateral or regional trade agreements that now span the world in a complex web of policy arrangements. Rodrik is on less familiar ground when the discusses international finance, and his plea for an international transaction tax could have been more substantiated.
In making the case for their pet theory, economists often miss the broader picture. Not so with Dani Rodrik. His list of principles and recommendations that close the book offer an all-encompassing agenda for a better and safer globalization. It is altogether fitting that the quote which best sums up his policy stance was offered by a Chinese student, who recommended to keep the windows open, but without forgetting the mosquito screens. This utterance could have been offered by a future statesman and, considering the wide audience that Dani Rodrik's essay deserves, it could as well be picked up by one.
on February 23, 2011
The Globalization Paradox adds rhetorical flair to Dani Rodrik's previous work condemning the intrusions of the WTO and IMF on the mechanisms of nation-states. Rodrik now dubs his enemy "hyperglobalization" (previously known as "deep integration") and insists that it be slayed to promote the diversity of social concerns across the world's democracies. The book augments the global economic governance chapters of "One Economics, Many Recipes" (a 2007 hodgepodge of the author's previous work) with richer historical context and topical material on the financial crisis and China's rise. I read several thoughtful reviews of Rodrik's last book in economics journals, and I am disappointed these reviews did not lead Rodrik to engage more of the recent economic literature in trade policy. Yet I still appreciate this book for asking important policy-relevant research questions that economists have often neglected.
A sizeable chunk of the book is navel-gazing: humbly defending the economics profession, while criticizing its members for unequivocally endorsing free trade in public. His most pointed barb is accusing economists of using more conditional views of free trade in the seminar room. I'm reminded of Elhanan Helpman and Paul Krugman's seminal 1989 trade policy monograph, which surveys several trade models in which government intervention is optimal. Yet the authors conclude, "The design of an advantageous trade policy requires information of a kind that is simply not available." This was not one of the seven "hand-waving arguments" Rodrik cites in support of free trade, but it's an important argument he should have engaged.
Rodrik downplays the concern from economists that much of trade policy in democracies is political rent-seeking. If there were a referendum for every trade policy decision, and citizens were perfectly informed about the impact of each one, would trade policy be much different from today? In other words, what share of trade policy originates from opportunistic lobbyists rather than legitimate democratic social preferences? I can imagine U.S. citizens protecting a few paper mill towns, but I don't see them keeping sugar quotas or subsidies for Brazilian cotton farmers.
What gains are left for further international liberalization? Rodrik argues wisely that because manufacturing liberalization has proceeded so far already, further liberalization will lead to much larger distributional effects than gains from trade. I was disappointed that Rodrik selectively cites Andrew Rose to suggest the GATT & WTO has had little effect on expanding trade, yet economists Arvind Subramaniam & Shang-Jin Wei have shown that only countries who actually liberalized themselves gained trade from the WTO -- as theory would predict. Rodrik is correct that overall gains from temporary migration (practically nonexistent at present) are much larger than gains from tariff liberalization. The same logic would suggest massive gains from liberalizing other forms of services trade (temporary migration of workers is but one form), and Rodrik does not mention this.
Even if one disagrees with Rodrik on normative trade policy, determining the ideal global institutions for balancing conflicting policy preferences across nation-states is still practically important. Rodrik makes a convincing case for the impossibility of global federalism (fantasy-crushing for Rodrik's Harvard Kennedy School students). He makes a good case that capital controls are necessary to allow for different national priorities in regulating finance. I'm less sold on Rodrik's claim that U.S. credit rating agencies are proof that labelling and corporate social responsibility cannot succeed: his example is a closed market in which government created rents by limiting entry to three firms. Regardless, I agree with Rodrik that nation-states are not going to completely surrender their sovereignty to a WTO-like organization, and there needs to be an institution that can allow them to negotiate over their distinct policy preferences.
Rodrik believes that the WTO overreached on national sovereignty, and he looks back longingly on the lighter integration of the GATT and Breton Woods regime from the late 1940s. What you won't learn from Rodrik is that Kyle Bagwell and Robert Staiger formalized such a theory, influential in the international law literature and published in top economic journals over the previous decade. Bagwell and Staiger suggest the ideal trade institution, similar to GATT, is one where nations negotiate over market access commitments, and countries should be free to choose any mixture of domestic policies and trade policies which maintains the negotiated level of market access. The mess of safeguard schemes that Rodrik instead proposes sound similar, yet it is hard to be sure without formalism. What is clear is that Rodrik believes domestic concerns are far more important than any international externalities created by trade and domestic policy choices, and he believes the market access focus of trade negotiations is problematic.
Rodrik used to have an active blog on international economics, but he came to a near full stop, believing that the blog and book-writing were substitutes. Still I hope the blog can be complementary to the further development of Dani's thinking on these important issues.
on April 18, 2011
Dani Rodrik gets it! Globalization of trade and finance makes sense to the extent that it can, or should, lift the economic hopes of people across the planet if it can be managed and regulated in such a way that it doesn't undermine an even more important pursuit for the future of the world, which is to strengthen civil society at the level of nation states everywhere. He argues that in our zeal to foster world trade and finance under the mantle of "hyperglobalization", we run a great risk of subordinating democracy to the interests of multi-national corporations and financial technocrats for whom accountability is to maximize shareholder profit. Profit is a perfectly appropriate goal for the world's enterprises, but Rodrik seeks to strike a balance between that goal and the capacity of individual countries to sustain their own resources, ways of living, labor laws, environmental protection, and a host of other factors that can be achieved best within the context of national governance, where democratic decision-making occurs. His analogy is that of updating the Bretton Woods accord that brought prosperity to much of the post war "free world" before organizations like WTO and others pushed the global trade structure toward a regime that subordinates the civil interests of nations to business interests of corporations. That's the big picture. The reader will find the details for a "sustainable globalism" to be thoughtfully developed in this timely book.
on July 2, 2011
Dani Rodrik is a gifted economist who has spent most of his professional life studying the evolution of the modern advanced liberal democratic economies. This book presents a political philosophy for the advanced countries. The audience is the interested layperson. There are no equations, tables or graphs in this book. Rather Rodrik's evidence is largely anecdotal, drawn from his vast experience.
Rodrik's message is simple. The first stage of capitalism was dominated by a hegemonic capitalist class and unregulated markets, guided by an ideology of laissez-faire. The second stage was dominated by the distribution struggle between industrial capital and industrial labor, with Keynesian economics in the ascendency. We are now in a third stage of capitalism in which globalization has thrown the supporters of labor in disarray, and in which a new set of nation-state level regulations are needed to protect democracy without losing the economic benefits of globalization.
The enemy for Rodrik is ultraglobalism, in which unregulated international capital flows prevent countries from redistributing in favor of the less well off, free trade principles prevent countries from applying their own environmental and product safety standards, and hypercompetition prevents countries from implementing desirable pay scales and occupational safety and health regulation. In short, says Rodrik, ultraglobalism is the enemy of democracy, because it prevents voters from making meaningful choices about the future direction of their own society.
Rodrik's recommendations for a healthy economic policy are far from radical. He recognizes that the prospects for "global government" are slim, so meaningful economic regulation will continue to be exercised at the nation-state level. He then asserts that each country has the right to determine its own social arrangements, regulations, and institutions, even when this self-determination interferes with globalization, and thus requires serious levels of economic protectionism. A replacement for Bretton-Woods for the control of international economic relations should permit the proliferation of national differences in the philosophy of economic regulation, should refrain from imposing the institutions of one country on another, except that democracy should be fostered in all countries, and non-democratic nations should not have full access to the international economy.
There are serious problems with Rodrik's argument, in my view. It is clear that his new regulatory order is aimed at resuscitating the power of organized labor to collude with big capital to raise wages and prices, and curtail competition over these and the quality of goods by restricting international competition. If Rodrik's regulatory system were in place in the last quarter of the 20th century in the USA, we would still be driving the gas-guzzler pigs of cars that the Big Three forced down our throats since WWII. What Rodrik calls "democracy" is really the exercise of special interests whose main goal is to prevent real competition. We can do without.
I do not think much of labor unions for the advanced liberal democracies in the present era. The maintenance of occupational safety and health are better served through national legislation that affects all workers, not a privileged few in a highly organized industrial sector. In the industrial era, where many important industries were oligopolistic so the bosses earned huge monopoly profits, the role of the union was to redistribute a portion of these monopoly profits to the firm's workers. With globalization, oligopoly has given way to competitive industries in which there is no monopoly surplus for redistribution. Accordingly, labor unions have all but disappeared except in the public sector, where workers can fight for a bigger share of the tax dollar.
It is interesting to consider the two major capital-labor battles in the USA that rage as I write: the owners of the National Football and National Basketball Associations pitted against their players. Why is there a battle? Because the NFL and NBA both have charters granted by Congress that gives them monopoly rights. With these rights come monopoly profits, whence the logic of the Players' Associations. In a competitive sports framework, unions are simply not worth the candle.
Of course, Rodrik's is an attempt to articulate a liberal political philosophy for an era in which the traditional supports for the Democratic party have weakened. I do not think his well-meaning attempt will be successful.
on April 19, 2014
First, excuse me for my English.
I found this book to be very well researched and documented from a historical point of view. From a technical perspective, the explanations are clear and the logic and conclusions are solid. But we, people from the poor countries feel there is another side to the story. One that Mr. Rodrik mentions just in passing: there IS a dark side. Are there hedgehogs, or just economists responding to their ideology or to the money they get paid by the elites and/or transnational corporations running the globalization show? There is no way they didn't know what would be the results or consequences of the models they proposed and still defend. Well, the results are there for all to see and the scheme is to get the world back to what Mr. Rodrik presents as Capitalism No. 1, and that is deep globalization with the WTO and the FMI doing the job the gunboats did in the past.
I really think this is a book that everybody should read and study..
on January 4, 2015
Chapter 10 of this stimulating book discusses concepts relating to global governance. It touches on basic ethical issues (citing Peter Singer and Amartya Sen) and on the possible broadening in the sense of community to a more global reach, as well as describing mechanisms of global governance: global standards, market information, global civil society engagement, negotiations between governments, inter-governmental institutions (in which staff from national governments coordinate), international organizations (with their own international staff), and multinational federations (primarily the EU). The author says (on page 208) that the subject is no longer for just "cranks and wide-eyed utopians."
Unfortunately, Prof. Rodrik raises the subject mainly to argue that not only is it impractical to develop good global governance mechanisms, but that they should be rolled back in favor of giving individual national governments more space to regulate cross-border affairs. He argues that this will politicize decisions on commerce, finance, regulations, and migration, and that while "economists would consider politicization a big step back" (page 265), it will improve democratic accountability. He treats the EU as "an exception" rather than as a model.
The quality of national policy making and accountability goes unexamined, however, leaving Prof. Rodrik's governance hypothesis essentially unsupported. Contrary to what Prof. Rodrik seems to assume, it seems to me that majority rule at the national level has always had to depend on higher standards to be consistent with basic human rights, whether those standards come from a cultural heritage or from the weight of global opinion. (Also, for a U.S. citizen writing in 2011, one might think that it would be the book's optimism about governance at the national level that would qualify as "wide-eyed." Prof. Rodrik's assumption that countries can be pigeonholed as either entirely "democratic" or entirely "authoritarian" needs thinking about as well.)
Furthermore, the concept of "nation" goes unexamined, greatly damaging the rationale behind Prof. Rodrik's analysis. Whatever the etymology of the word, nations are made, not born. Internal homogeneity and sense of community are never so strong as official pronouncements would have it, and they develop largely after geopolitical forces assemble the country. School children may imagine that today's countries always existed and always will, but in reality the process of assembling and disassembling nations goes on as you read these words. Prof. Rodrik's proposal to stop the clock, or indeed to roll back the tide on global governance, not only would obstruct constructive public policy, but in principle should be applied to existing "nations" also. Bring back the Kingdom of Hawaii! Long live the Duchy of Burgundy! :-)
Despite these criticisms, I think Prof. Rodrik makes many points worth considering. One is that most of the gains from trade liberalization have been achieved and that national deviations at this point would probably be acceptable from a pure comparative statics point of view ("little triangles") if it were argued that there were offsetting advantages of technical development. Another is that the gains from financial regulation are, on the contrary, far from being exhausted. (Prof. Rodrik doesn't see how this would apply to currency integration, however.)
Chapter 11 as a whole is a compendium of specific recommendations, which despite seeming in many cases to be very interesting are advanced with much less background and analysis than they may deserve. They might better have been eleven chapters rather than just chapter 11.
One of these ideas, however, that high-income countries should permit (or engineer) greatly expanded short-term immigration from low-income countries, does seem hard to square with Prof. Rodrik's preference that local politics should rule decision making, but here he insists that "economists have remained excessively tolerant of the political realities."
Overall, this is a book that is stimulating despite a certain lack of coherence.
on December 28, 2011
This is a nice book that helps explain a great deal of present economic and financial dynamics. I liked very much its realistic (ie scientific) attitude towards the limits of globalization due to unavailability of global institutions of regulation and governance. The book does a good job in explaining the dangers and collateral damages of unrestricted trade and finance. However, the author never explains fully the political and economic powers that enforced globalization on EU and USA states. After reading the book you are not much wiser as to why European and American societies had to be disturbed and inflicted with mass unemployment and financial disasters before the problematic nature of all was realized again (cause
this has happened before). It is as if the lives of millions of Europeans that needed hundreds of years in order to achieve their remarkable social and economic order were part of a grotesque experiment.
Overall the book has some good ideas. But the discussions are not as direct as should have been and at places it all appears as a kind of postdisaster wishful thinking rather than an uncompromising analyses of the shaping forces of social and economic dynamics. Three stars for its correct conclusions.
on May 28, 2016
Professor Rodrik deals with the economics of globalization as it actually affects people, not just so-called “free trade” but financial globalization and other forms of neoliberalism too. So he, like Stiglitz and others, is now calling for an overhaul of what he calls “hyperglobalization”. Basically, he says, nations need to be given a lot more leeway to respond to their domestic priorities, as demonstrated by democratic politics, rather than be locked into WTO and trade agreement straitjackets.
This neoliberalism has failed abysmally, as in the Asian, Argentinian, and 2008 financial crises, also in the slow development of so many countries in Latin American and around the world who followed the IMF orthodoxy, versus the spectacular success of the Asian tigers and China who adopted a variety of protectionist measures to achieve their export goals.
Rodrik points out that hyrperglobalization, or “deep integration”, fails because the world economy lacks the strong institutional support of robust domestic markets. For example, “there is no global anti-trust authority, no global lender of last resort, no global safety net, and no global democracy” (p. xvi). “Markets work best, not where states are weakest, but where they are strong” (p. xviii). “With very few exceptions, the more developed an economy, the greater the share of resources that is consumed by the public sector” (p. 16). “Governments have grown the largest in those economies most exposed to international markets” (p. 17).
More generally, Rodrik identifies a “Political Trilemma” – “we cannot simultaneously pursue democracy, national determination, and economic globalization” (p. xviii). In his view it is the latter objective that must be limited, not the former two. His model here is the GATT system of the Bretton Woods regime, which preached free trade but allowed a great deal of variance in practice, resulting in the best era of global economic growth in human history.
My fundamental criticism is that Rodrik rejects global governance as impractical, but how can we achieve limited globalization without some form of democratic global governance? That is, the generosity that characterized the post WWII era – the golden era of capitalism -has long since been replaced by the “greed is good” ideology of the Reagan / Thatcher era. Today little stands in the way of corporate power except resistance from second tier countries, as in the Doha round, and from the marginalized, as illustrated by the Battle of Seattle and the World Social Forums. Now, as this resistance matures into the first stages of revolution even in the US (Bernie and Trump), it would be wise to conceptualize a more democratic order, both domestically and internationally, to dampen the increasing conflicts and wars that we face as the world reaches its limits to growth. Instead Rodrik confuses democratic global governance with the “golden straightjacket” of neoliberalism, a world “shoehorned into common rules” (p. 204) instead of the respect for human rights and diversity that characterizes true democracy.
In fact, as Rodrik admits, “Where there is globalization, there are rules. What they are, who imposes them, and how – those are the only real questions” (p. 9). And “markets are not self-correcting, self-regulating, self-stabilizing, or self-legitimizing” (p. 22). “The resources used in international exchanges must be valued at their true social opportunity costs rather than at prevailing market prices”(p. 53). All too true, but the market orthodoxy is not just intellectual, it is the life blood of the predatory behavior that has produced the wealth and power of the one percent. I doubt that “calling out” Wall Street, Hillary style, will stop billionaires and transnational corporates from buying politicians to serve corporate greed.
Rodrik needs to envision a global political revolution to make for a more democratic and sustainable globalized world. The real alternative is the “collapse” that follows from ecological and political overshoot, as evidenced by the many collapses of past empires and civilizations. Instead his favorite solution is the “mobility of labor”, meaning new revolving guest worker programs, despite the fact that the US, for example, does not have full employment. Nor does the business establishment want full employment, since that would raise its cost of labor, and the Fed treats this as “inflation” to be combatted with extreme urgency, while ignoring inflation in financial assets.
on August 5, 2011
Dani Rodrik, Professor of International Political Economy at Harvard University, argues against financial globalisation and for countries to put their people first through industrial policy. He points out that the Bretton Woods system was built on the belief that countries' domestic needs would and should trump the global economy's demands.
Countries that rely on international finance do poorly. He writes, "The benefits of globalisation come to those who invest in domestic social capabilities. These investments in turn require some degree of support for domestic firms - protective tariffs, subsidies, undervalued currencies, cheap funding, and other kinds of government assistance ... The deep integration model of globalisation overlooks this imperative. By restricting in the name of freer trade the scope for industrial policies needed to restructure and diversify national economies, it undercuts globalisation as a positive force for development."
As Rodrik notes, "National democracy and deep globalisation are incompatible." Governments cannot meet both the demands of foreign creditors and the needs of their own people.
He argues against trade fundamentalism, as expressed in World Trade Organization rules and in World Bank and IMF practice. Fixed exchange rates and capital mobility both enslave countries to other countries' monetary policies. Opening up to foreign economic intervention means facing greater risks, and less growth. More capital inflows do not mean more growth.
In 1991, Argentina's Convertibility Law tied the peso to the dollar, strangling the economy, just as the euro is doing to Greece, Portugal, Cyprus, Italy and Spain. In 2001-2, Argentina defaulted on its foreign debt, reimposed capital controls, devalued the peso, froze utility prices, increased social spending, improved its tax collection and created import substitution industries. The markets screamed, but Argentina's economy grew by 63 per cent in six years, pulling 11 million people out of poverty.
on October 7, 2014
The thesis Rodrik presents (the trilemma of globalization, democracy, and nation states) is persuasive as far as it goes, but his seven principles for Capitalism 3.0 are only slightly less wobbly than the current global situation. His cautions for China’s future success are worthy, but there’s no discussion concerning what might happen if China avoids the worst and continues to reform. If they continue to grow and some reforms do occur, reducing their involvement in his process simply because they are not “democratic” may be a bit short-sighted.
I gained a good deal of clear thinking value from this book and it has expanded my scope for considering large scale economic and political interactions.