A Guest Review of Dani Rodrik’s [amazon_link id=”0199603332″ target=”_blank” ]The Globalisation Paradox: why global markets, states and democracy can’t coexist[/amazon_link]
By Nooman Haque
There is, wrote David Glasner of the FTC recently, ”No other proposition in economics that students hate or find harder to reconcile with their notions of common sense”. Paul Krugman remarked that it’s the closest thing the profession has to a sacred tenet and affirming it would be part of an Economist’s Creed. Others liken adherence to it as a Masonic rite, to be betrayed on pain of death. It is the profession’s sole technical achievement to unite economists of all political hues.
The proposition is, of course, the theory of Comparative Advantage; economics’ most elegant model whose engagingly simple mathematics blend seamlessly to a moral argument for freedom, free trade and globalisation. If the theory were a sport, journalists would call it “Total Economics” and ruminate wistfully about how they don’t have Theories like that any more. It IS the jewel in the crown so it’s no surprise that economists unite against the Barbarian horde to protect this citadel of their profession. And no surprise that even the most minimal departures in public invite accusations of heresy.
Dani Rodrik of Harvard University plays the part of Luther, questioning whether the reality of free trade can really be as beautiful as the creed would have us believe. In his latest book he champions a “second-best” approach to globalisation to present an argument for a feasible free trade model that allows efficiency gains without the subordinating national politics. Given the stakes, he also challenges his colleagues to come clean about the complexity of the theory. It is an important book, made more relevant in the light of continuing high unemployment in the US and the ongoing debate about offshoring jobs.
The theory of comparative advantage imparts a Zen-like profundity to those that (finally) get it, yet even seasoned professionals call fall prey to its apparent impossibility. It is worth stating the simple proposition here:
Even if a country is less productive than other countries in producing every single product that it produces, it would still have a lower cost of production in at least one of those products, and could profitably export that product in sufficient amounts to pay for its imports of other products
Did you find “stubborn popular prejudices”, as Krugman called them, taking over? You are not alone. But we know Comparative Advantage to be impeccably logical, so any persuasive argument to NOT have free trade seems impossible, yet Rodrik draws on history and empirical work to dissect previous eras of apparent “free-trade” showing how protectionism was rife; efficiency gains occurred and trade was the servant of national politics. Moreover he asserts that a “hyperglobalisation” as preferred by some, is flawed because the institutions that make the case for free trade within national borders logical, simply don’t exist at a global level. The point being that such hyperglobalisation is likely to fall into this governance gap creating a trilemma: we must choose between two of national democratic politics, hyperglobalisation or nation states.
Rodrik makes his own position clear: global governance is myth, and models like the Eurozone expose the problems of achieving such integration when countries share a common heritage. So if we still want hyperglobalisation and nation states to exist, then we have to subordinate national politics in the pursuit of the global interest. The Gold Standard era is consistent with such a position but Rodrik argues that its demise showed again how national priorities will trump attempts at global governance. The solution, he argues, is a Bretton Woods compromise, that preserves local democracies and nation states, whilst leaving plenty of room for non-absolute form of trade.
The design of Bretton Woods and GATT in fact, clearly illustrates his point. Bretton Woods bought much needed international stability and cooperation yet gave countries breathing room and encouraged trade as economies grew in response to their specific local environment. Yet even Bretton Woods collapsed when US national interests took precedence over international objectives. Similarly GATT at the outset never had the objective of forcing free trade, but gave countries local policy space to develop their own versions of capitalism; hyperglobalisation took a back seat. As GATT gave way to the WTO, and especially the elimination of capital controls, hot money flows created havoc, the ultimate result of which was to force the medicine of the Washington Consensus onto countries, subordinating local policies and preferences. Rodrik further argues that other WTO initiatives such as global intellectual property agreements also suffer from a one size fits all approach, and in particular protect developed nations at the expense of others.
Students familiar with Ricardo’s formulation, or Martyn’s analogy of trade being akin to technological progress will question whether trade liberalization is really to blame and if it is, then whether textbook policies such as compensation and non-restrictive measures might be better than protectionism. Rodrik also champions the traditional model also but shows how it is incomplete. Bringing a magnifying glass to the fine print, he explains how there is nothing in the theory that guarantees that, in the long-run, the necessary redistribution that is the hand-maiden of free trade will leave us all better off; some calculations suggest that for an extra dollar of efficiency gain from trade, there are $51 of redistribution. And as Rodrik explains, this is partly because we have almost free trade now and quite possible we’re into diminishing marginal returns (in the analogy with technology, that part is often missed out). Pushing further for ever more miniscule gains risks political and economic disruption that could portend, ironically, greater protectionism. Everywhere we turn, the trilemma rears its head.
And the case for some protectionism is apparently supported by the historical experiences of Taiwan, South Korea, India, Japan under the Meiji, as well as China. In these instances, an active government policy to develop a capability base sowed the seeds of future success. In the absence of these policies, Rodrik argues, their experiences may have been more like commodity exporters, focused on their comparative advantage but exposed to price swings and lacking an incentive to diversify the economy beyond commodities.
And this is Rodrik’s key point, that globalization, if it is like a technology, must surely leverage capabilities across national borders. The seductive charm of arguing that Portugal’s climate requires it to grow grapes doesn’t speak to the nuance that making wine and port requires a level of technical and management ability that the comparative advantage of ‘climate’ on its own won’t deliver.
Many will be irked by Rodrik’s views as they imply benign, forward-thinking technocrats not just in pursuit of the public interest, but capable of implementing it. Japan, China and Taiwan may have achieved stellar success, but their interventionist approach certainly didn’t guarantee it. Indeed China’s pathway to economic liberalism seems to have been dependent on a state-led catastrophe of earlier years. And that is a paradox not addressed adequately here: poor countries are poor not, primarily because they are forced to open their borders and compete with developed nations, but because they have poor institutions and feckless Governments. Rodrik would prefer to keep borders partly closed so the country can learn and develop capabilities that can be traded. But the sucker punch is that this requires a Government interested in this objective in the first place. Countries heavily reliant on commodity exports for example tend to be autocratic where revenues are seized by despots. It is hard to conclude that allowing these nations greater domestic policy space will advance development more than a more open trade policy.
But to unpick Rodrik’s argument with an extreme example would also be a demonstration of faith over reality. The point at which we become wedded to globalization because it IS a Creed, not a theory.
Ultimately the greater paradox is why the beauty of the market system and trade shouldn’t apply to capitalism itself? To argue otherwise is to argue that we know precisely what works in each and every situation. Therefore implementing forms of capitalism that respond to local cultures and traditions, whilst encouraging further integration in an evolutionary manner, is superior to, as Rodrik puts it, opening the window without a mosquito screen in place.
Perhaps then we need to stop and ask if, for example, modest infant industry protection really is a slippery slope to Smoot-Hawley. Perhaps we need to read the small print on the theory and ask if the necessary pre-conditions are in place. And perhaps measures like tariffs should be seen as the last transaction cost to be overcome, after countries have solved issues of intra-national labour mobility and institutional development that can at least give them the platform to compete globally when tariffs are reduced. But we also need to ask if the Governments we are protecting are in a position to do the right thing and to what extent we will countenance abject national policy failures that leave millions destitute and subjugated, or, in developed countries, play to the hands of powerful interests.
Rodrik presents a nuanced argument for globalisation in a political framework that lays bare the stark choices we must make. As a serious trade theorist sympathetic to globalisation in general, but also a pragmatist driven by evidence, his view deserves to be taken seriously.
[amazon_image id=”0199603332″ link=”true” target=”_blank” size=”medium” ]The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist[/amazon_image]
