The Globalization Paradox: Democracy and the Future of the World Economy Reprint Edition

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.

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.

I have the paperback. On page xix, the author says, in italics: "Democracies have the right to protect their social arrangement, and when this right clashes with the requirements of the global economy, it it the latter that should give way." Thus, the basic paradox arises from the clash between economic and political self-determination. Generally, I was impressed with the author's integrity and intellectual effort to describe, analyze and prescribe paths to balance these competing interests.The book describes the historical development of current international organizations created to assist in the functioning of the global markets - WTO, GATT, IMF and others. The author clearly finds the Bretton Woods international trade regime crafted at the end of world War II highly commendable. I digress for one observation that the author, and others, view the gold-based trade system developed in the 19th century as the first effort at globalization, which came to a violent end in 1914 with the advent of World War I. I note this simply I find this to be a sobering observation.The author found much in Bretton Woods to like in its careful balance of trade interests while recognizing the sovereignty of nation-states. With the collapse of Bretton Woods in the 1870s, subsequent efforts to advance globalization have been, in the author's view, less successful because they impinge, or at least threaten to impinge, on national sovereignty.The book considers both trade and financial globalization. Keep in mind that this book was published 3 years after the financial debacle of 2008. My sense is that the author is less tolerant of financial globalization than he if of trade globalization. He notes on page 111: "Countries that have opened themselves up to international capital markets have faced greater risks, without compensation benefits in the form of higher economic growth."Keep in mind that he is very clear that markets don't regulate themselves and that "free" trade and governmental regulation of some kind are opposite sides of the same coin. If you are what he characterizes as a "trade fundamentalist" who believes in essentially no governmental regulation of trade, then you will probably not find the book congenial.I found the book's description of the WTO, GATT, etc., provided enough to inform me, but light enough not to lose me. The history of trade was also informative without being overly dry. Since I am trying to learn about globalization, I found this useful.I deducted a star because some of his proposals for furthering globalization lost his initial commitment to sovereignty. This is probably the result of the book being written 9 years ago. An underlying, unspoken assumption seemed to be that the U.S. could take whatever globalization threw at it. Gains from free trade redistribute wealth. As he says on page 57: "The new industrial revolution that Blinder talks about promises to bring huge economic rewards as larger and larger parts of the economy reorganize along the lines of comparative advantage. It is a necessary consequence of this restructuring that workers will experience economic insecurity. Many will see their wages permanently reduced. Once again: no pain, no gain." The effect of this can be seen in an article in MIT Technology Review, Sept.-Oct. 2020 edition, entitled Unmade in America beginning on page 68, which reviews the devastating effect of globalization on U.S. manufacturing. I commend this article to you.Lastly, he reviews China's trade policies. On page 277, he writes: "The right approach would be to leave China, and indeed all emerging nations, free to pursue their own growth policies....It would then be reasonable to expect that China and other emerging nations will pursue currency, financial and macroeconomic policies that do not generate large trade imbalances." I would direct you to Professor Michael Pettis's book The Great Rebalancing to see how that turned out. As I said, I think that Professor Rodrick has integrity and I suspect that if he were writing this book today, he would be much more circumspect.I found the book valuable for its description of the historical background and development of the current world trade regime. I think he is fair in his analysis of many of the trade conflicts including those involving the U.S. I agree with his observation governmental rules for trade are essential. For this I recommend the book.I would skip Chapter 12 where he proposes a "sane" globalization. The author should simply accept his original premise that nations should have priority over trade and then see what results in any individual trade issue.