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The Globaization Paradox.hwp

Dani Rodrik's "The Globalization Paradox"

Sunday, March 13, 2011; B07

It is dogma among economists and right-thinking members of the political and business elite that globalization is good and more of it is even better. That is why they invariably view anyone who dissents from this orthodoxy as either ignorant of the logic of comparative advantage or selfishly protectionist.

But what if it turns out that globalization is more of a boon to the members of the global elite than it is to the average Jose?

What if most of the benefits of the free flow of goods and capital across borders have already been realized, and any gains from additional globalization will be outweighed by the additional costs in terms of unemployment, reduced wages, lost pensions and depopulated communities? What if global markets, to be widely beneficial, require the kind of global governance structure that does not yet exist and that most people would oppose? What if it turns out that the countries that have benefited most from free-market globalization are not those that have embraced it wholeheartedly, but those that have adopted parts of it selectively?

In "The Globalization Paradox," Dani Rodrik demonstrates that those questions are more than hypothetical - that they describe the world as it really is, rather than as it exists in economic theory or in the imagination of free-trade fundamentalists.

A professor of international political economy at Harvard University, Rodrik has become one of the most powerful critics of what he calls the "hyper-globalization agenda" favored by the corporate community and academic economists. Rodrik laid the groundwork for his critique back in 1997, in his first book, which was published before the Asian financial crisis and the big anti-globalization protests. A decade and a monster global financial crisis later, he has now reframed the debate as one between "smart globalization" and "maximum globalization." Although his message is nuanced and rigorous, drawing on history, logic and the latest economic data, he manages to convey it in simple, powerful prose that any reader can follow.

The starting point of Rodrik's argument is that open markets succeed only when embedded within social, legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared. Defenders of globalization have always noted that the richest countries tend to be those most open to the rest of the world in terms of trade and investment. Rodrik goes a step further by noting that the most open countries are also the ones with the biggest governments, the most extensive and effective regulation, and the widest social safety nets.

The reasons for that should be obvious, says Rodrik. Globalization, by its very nature, is disruptive - it rearranges where and how work is done and where and how profits are made. Things that are disruptive, of course, are destabilizing and create large pools of winners and losers. Any society, but particularly democratic societies, will tolerate such disruption only if there is confidence that the process is fair and broadly beneficial. That's where government comes in: Markets and government, Rodrik asserts, are "complements."

That was true as far back as the earliest waves of globalization, when the rules of trade were set by colonial powers, often operating through chartered trading corporations that became governments unto themselves. It was certainly true during the 19th century, when the bedrock of global commerce rose and fell and rose again with the gold standard. And it was true during and after World War II, when the new arrangements adopted at Bretton Woods, N.H., explicitly recognized that the operation of the global economy should respond to the social and economic needs of individual nations, rather than the other way around.

As Rodrik sees it, globalization began to run off the rails when it got hijacked by the notion that any restrictions on the flow of goods or capital across borders would result in great sacrifice to efficiency and economic growth. Not only was this free-market ideology imposed by the United States on developing countries through the interventions of the World Bank and the International Monetary Fund, but it was also imposed on the United States itself through a succession of free-trade treaties, the deregulation of finance and the retreat from any semblance of industrial policy.

The irony, Rodrik notes, is that the countries that experienced the greatest growth during the heyday of the "Washington consensus" were Japan, China, South Korea and India, which never embraced it. For years, they had nurtured, protected and subsidized key industries before subjecting them to foreign competition. They had closely controlled the allocation of capital and the flow of capital across their borders. And they flagrantly manipulated their currency and maintained formal and informal barriers to imports. Does anyone, he asks, really think that these countries would be better off today if they had played the game, instead, by the Washington rules?

The paradox, as Rodrik sees it, is that globalization will work for everyone only if all countries abide by the same set of rules, hammered out and enforced by some form of technocratic global government. The reality is, however, that most countries are unwilling to give up their sovereignty, their distinctive institutions and their freedom to manage their economies in their own best interests. Not China. Not India. Not the members of the European Union, as they are now discovering. Not even the United States.

In the real world, argues Rodrik, there is a fundamental incompatibility between hyper-globalization on the one hand and democracy and national sovereignty on the other.

Rodrik is at his weakest in trying to come up with a new framework for Global Capitalism 3.0, so I won't bother you with the details. The crucial message to take away from this important book, however, is that the worst thing we could do for the legitimate cause of globalization right now is to push it any further. In most countries, plenty of work still needs to be done to manage the economic integration that has already developed and to ensure that the benefits become more widely shared. Until that is accomplished, pushing things further will only create political backlash and set back globalization's cause.

In his famous treatise "The Wealth of Nations," Adam Smith acknowledged that "the division of labor is limited by the extent of the market." By extending the market as far as it can go, globalization offered the prospect of finally removing all limits to specialization by workers and businesses everywhere in what they do best.

Now comes Rodrik with a much-needed addendum to Smith's famous formulation, one that the Scottish philosopher himself would have admired: The extent of the market is limited by the workable scope of its regulation.

Dani Rodrik is Professor of International Political Economy at Harvard University’s Kennedy School of Government and a leading scholar of globalization and economic development. His most recent book is The Globalization Paradox: Democracy and the Future of the World Economy.

Free-Trade Blinders

09 March 2012

CAMBRIDGE – I was recently invited by two Harvard colleagues to make a guest appearance in their course on globalization. “I have to tell you,” one of them warned me beforehand, “this is a pretty pro-globalization crowd.” In the very first meeting, he had asked the students how many of them preferred free trade to import restrictions; the response was more than 90%. And this was before the students had been instructed in the wonders of comparative advantage!

We know that when the same question is asked in real surveys with representative samples – not just Harvard students – the outcome is quite different. In the United States, respondents favor trade restrictions by a two-to-one margin. But the Harvard students’ response was not entirely surprising. Highly skilled and better-educated respondents tend to be considerably more pro-free trade than blue-collar workers are. Perhaps the Harvard students were simply voting with their own (future) wallets in mind.

Or maybe they did not understand how trade really works. After all, when I met with them, I posed the same question in a different guise, emphasizing the likely distributional effects of trade. This time, the free-trade consensus evaporated – even more rapidly than I had anticipated.

I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s.amp#160; This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick?

Those who voted affirmatively were only a tiny minority. Many were uncertain. Even more opposed the change.

Clearly the students were uncomfortable about condoning a significant redistribution of income, even if the economic pie grew as a result. How is it possible, I asked, that almost all of them had instinctively favored free trade, which entails a similar – in fact, most likely greater – redistribution from losers to winners? They appeared taken aback.

Let’s assume, I said next, that Nicholas and John own two small firms that compete with each other. Suppose that John got richer by $300 because he worked harder, saved and invested more, and created better products, driving Nicholas out of business and causing him a loss of $200. How many of the students now approved of the change? This time a vast majority did – in fact, everyone except Nicholas approved!

I posed other hypotheticals, now directly related to international trade. Suppose John had driven Nicholas out of business by importing higher-quality inputs from Germany? By outsourcing to China, where labor rights are not well protected? By hiring child workers in Indonesia? Support for the proposed change dropped with each one of these alternatives.

But what about technological innovation, which, like trade, often leaves some people worse off. Here, few students would condone blocking technological progress. Banning the light bulb because candle makers would lose their jobs strikes almost everyone as a silly idea.

So the students were not necessarily against redistribution. They were against certain kinds of redistribution. Like most of us, they care about procedural fairness.

To pass judgment on redistributive outcomes, we need to know about the circumstances that cause them. We do not begrudge Bill Gates or Warren Buffett their billions, even if some of their rivals have suffered along the way, presumably because they and their competitors operate according to the same ground rules and face pretty much the same opportunities and obstacles.

We would think differently if Gates and Buffett had enriched themselves not through perspiration and inspiration, but by cheating, breaking labor laws, ravaging the environment, or taking advantage of government subsidies abroad. If we do not condone redistribution that violates widely shared moral codes at home, why should we accept it just because it involves transactions across political borders?

Similarly, when we expect redistributive effects to even out in the long run, so that everyone eventually comes out ahead, we are more likely to overlook reshufflings of income. That is a key reason why we believe that technological progress should run its course, despite its short-run destructive effects on some. When, on the other hand, the forces of trade repeatedly hit the same people – less educated, blue-collar workers – we may feel less sanguine about globalization.

Too many economists are tone-deaf to such distinctions. They are prone to attribute concerns about globalization to crass protectionist motives or ignorance, even when there are genuine ethical issues at stake. By ignoring the fact that international trade sometimes – certainly not always – involves redistributive outcomes that we would consider problematic at home, they fail to engage the public debate properly. They also miss the opportunity to mount a more robust defense of trade when ethical concerns are less warranted.

While globalization occasionally raises difficult questions about the legitimacy of its redistributive effects, we should not respond automatically by restricting trade. There are many difficult trade-offs to consider, including the consequences for others around the world who may be made significantly poorer than those hurt at home.

But democracies owe themselves a proper debate, so that they make such choices consciously and deliberately. Fetishizing globalization simply because it expands the economic pie is the surest way to delegitimize it in the long run.