Dani Rodrik’s recommendations

An interview with...

Dani Rodrik on Globalisation

About Dani Rodrik

Dani Rodrik is the Rafiq Hariri Professor of International Political Economy at the John F Kennedy School of Government, Harvard University. He has published widely in the areas of international economics, economic development, and political economy. His latest book, The Globalization Paradox: Democracy and the Future of the World Economy will be out in February 2011.

Political economist Dani Rodrik says the history of globalisation goes back not just to 1980, not just to 1945, not just to the ‘first era of globalisation’ in the 19th century – but all the way back to the Mongol conquests

What is globalisation? Is it just about trade and finance?

It’s obviously much broader that that. It’s also about norms: one area where I think globalisation has been an unmitigated blessing is that democracy and human rights have become much more of a global norm. So it is broader, although my own work tends to focus on economic globalisation.

The first book on your list is Power and Plenty by Ronald Findlay and Kevin H O’Rourke. Can you tell me a bit about it and why it’s on your list?

This is really a magisterial tour of the last thousand years of globalisation. It’s written by two economists who also happen to be superb historians, and they go back to the year 1000. For me two things about this book stand out. One is it’s a very valuable reminder that globalisation has a history. It’s a history that goes back not just to 1980, not just to 1945, not just to the so-called first era of globalisation of the 19th century – but all the way back to the Mongol conquests and the manner in which inter-continental networks of trade were spawned throughout history. In other words, globalisation is very old and has been with us for a very long time. The second useful thing that comes out of it, and in a way the main theme of the book, is that political power and economic globalisation have always been intertwined. Economists have a tendency to think of economic globalisation as something that emerges purely out of the instinct of humans to want to barter and exchange. What the book shows is that the ebb and flow of globalisation have been intimately linked with military conflict, with the rise of political power, with competition among the great powers. And we miss a lot of the picture if we don’t understand that behind economic globalisation of any kind is a certain structure of political power.

How is that knowledge useful to us today?

It helps us realise that each type of globalisation has to be backed by certain configurations of power. And, as those configurations change, we need to think about a somewhat different type of economic globalisation. So the immediate post-war period, the Bretton Woods period of economic globalisation, was underpinned by US political dominance in the world economy. The World Bank, the IMF, the GATT and WTO were made in the image of what the US wanted to construct. It was, fundamentally, an extension of US power, just as the 19th-century globalisation was an extension of British naval power and British imperialism. What that means, going forward, is that as the US power recedes and we go into a multi-polar global system, it renders fundamentally impossible the type of economic globalisation we’ve had in the past few decades. So we need to think of a new kind of globalisation that is going to be underpinned by a multi-polar system, a much more heterogeneous configuration of political power at the global level.

And does your own book offer some clues as to what that new system should look like?

Yes, I would hope so!

Before we get to that, tell me about Global Capitalism: Its Fall and Rise in the Twentieth Century by Harvard political scientist Jeffry Frieden.

This book is also historical and takes a much closer look at the last two centuries of economic globalisation. What’s very useful about it is that it underscores that economic globalisation is not inevitable: Frieden spends a lot of time looking at the collapse of globalisation in the interwar period in the 20th century. The book is also very good at underscoring the domestic political prerequisites of globalisation.

How does that relate to what is going on now?

I think the lesson is very much with us. Right now we are going through a period when globalisation is being questioned, for the same kinds of reasons that it came under attack and was overwhelmed during the interwar period. The fundamental question is about the compatibility between a system of politics that is still organised around nation states and a global economy where national economies are intertwined and markets have gone global. I think these two things – the domestic nature of politics and the global nature of markets – are fundamentally in tension. It was the mismanagement of this tension that led to the collapse of the gold standard in the earlier era of globalisation – an episode the Frieden book describes so well – and the future of our current round of globalisation will depend on exactly our skill in managing the same tension now.

You think the pressures now are as severe as they were back then?

Very much so. There is political tension between the groups who are largely the beneficiaries of economic globalisation – either because they’re internationally mobile like firms or because they have the kinds of skills that allow them to prosper in the global economy – and those who are not so lucky. Those who are not so lucky are, in many countries, still a large majority of people and they want their democratically elected governments to be much more responsive to their needs, at a time when governments just say: ‘Globalisation made me do it! I can’t do anything else!’ It’s this tension that we need to be grappling with.

But don’t you think people have a better understanding of the economics now, which means globalisation is less at risk? Fifty years ago many people believed that Communism was a viable economic alternative – whereas today, even if you’re very left-wing, you realise you need to pay attention to the dynamics of the market or else it’s likely to end in disaster…

Yes. I think one good thing is that pretty much everybody understands that there really is no alternative to market-based systems. But that still leaves huge room for argument about the type of market system. If you look at the national economies of different countries, they have very different kinds of market-based systems. The US economy is very different from the Swedish economy, which in turn is very different from the French economy, which in turn is very different from the Japanese one. And all of them are very different from the kind of market economy China is. So there are many, many different ways of constructing a market economy. What is the role of the state? What is the role of the welfare state? What is the role of regulation? How much redistribution should there be? What should the tax system look like? What should the consumer safety regulations look like? How organised should labour markets be? These are all questions that different societies have to resolve for themselves. But global markets are fundamentally hostile to heterogeneity on these questions, so what economic globalisation tends to do is push for uniformity, to push for similarity in standards and regulations. It is not entirely clear that this is desirable – either politically or economically. And it’s certainly not inevitable in any way – because it’s up to governments and policy-makers to decide to what extent they want to go down that route.

Your next book is by Berkeley economist Barry Eichengreen. How does it fit in?

Globalizing Capital focuses specifically on financial globalisation and the history of financial globalisation. What I like about this book is the clarity with which it describes certain dilemmas that financial globalisation creates. Those dilemmas are very much the same ones that we’ve been discussing, but here we see them specifically in the area of macroeconomic policy. The gold standard came to an end precisely when the assumption that domestic economic policy should be driven by the needs of an international gold standard, at the expense of any kind of domestic policy objective, became untenable. What had sustained the gold standard in the 19th century was the idea that monetary policy didn’t have to have any domestic objectives. The only priority for monetary policy was, first of all, to keep a fixed parity to gold, and secondly, maintain open capital flows. What happened when those objectives came into conflict with domestic employment or domestic price stability or domestic economic growth? The standard gold standard answer was that you just had to grin and bear it – no matter how costly it was going to be.

But by 1931, when Britain came off gold again and the gold standard began to unravel, the domestic polity had changed significantly – with the organisation of the world’s working classes, with much stronger trade unions and the expansion of the franchise. The presumption that domestic macroeconomic policy could be insulated from the pressure of these domestic organised groups in a more democratic environment became untenable – and Britain said to hell with the gold standard. That lesson – which the Eichengreen book describes in great detail – is again something that is very much with us. We keep learning it over and over again.

For example, it’s the lesson that many countries in Europe are having to learn right now. Those countries that are in the Eurozone are essentially in a fixed exchange rate arrangement, just like the gold standard. In order to maintain that fixed exchange rate, their common currency, they are having to make their economies go through very, very wrenching, and costly adjustments. If Greece and Spain and Portugal and Ireland are living with it, that’s presumably because they think there’s a greater benefit to being members of the European Union, to be part of some kind of political union of the future. So there’s some compensating benefit.

In 2001/2002, Argentina went through a similar kind of experience. In that case there was no compensating benefit so that the Argentines eventually ended up renouncing the fixed exchange rate and stopped repaying their external debt. So this kind of experience keeps coming back. On the one hand, you want to put on the golden straitjacket and hope that it will lift you up. On the other hand, the golden straitjacket becomes very expensive at times of stress, and then the temptation to throw it away becomes way too strong.

Is he also looking at inflows and outflows of capital causing instability, the Asian financial crisis and other crises we’ve had?

Yes, very much so. Financial crises are a recurring feature of financial globalisation and we see that going back to the various banking crises under the gold standard, the highly turbulent 1920s, and then, increasingly since the 1980s, a series of sovereign debt and financial crises that have rocked the world economy. Eichengreen does a very good job of giving us that story too.

So, your next book is Peter Singer on the ethics of globalisation, One World.

This is a relatively small book but with a very big idea. I like to use it to test my students’ intuition about the ethical basis for globalisation. Singer makes a simple and, on the face of it, very plausible point which is that the extent to which we care for other human beings shouldn’t depend on what side of the border they live. Taken to its logical limit, it has very powerful implications about how we should conduct our own lives as well our domestic policy – what kind of ends domestic government policies should pursue. It’s a very good book in terms of laying out an extremely cosmopolitan view of justice and ethics. I don’t subscribe to much of what he says, but I do think that he lays out a challenge to those of us who, like me, are sceptics to be clearer as to our reasoning.

I’ve never understood why we’re supposed to care more about those who share our nationality than those who don’t. I also don’t see the justice in an immigration system that makes it hard for foreigners to get a visa/work permit to work in countries like the UK and the US legally. Singer’s arguments make a lot of sense to me. Why do you disagree with him?

For a number of reasons. It does make a difference, even from an ethical standpoint, that the world is organised under different political institutions. I would agree with him that as part of a common humanity we all have a responsibility to help in cases of extreme humanitarian distress. But where I would disagree with him is on whether we have an equal responsibility to try to help in cases where economic disadvantage results largely from the workings of domestic political institutions or the failures thereof.

To explain this a little bit more: to Singer it is fairly obvious that if a child in, let’s say, Bangladesh is poor and deprived then it’s incumbent on us to transfer a reasonable share of our wealth to Bangladesh for the use of that child and his or her family. I think this question is not so straightforward, because the presumption that by simply transferring wealth we are making that child in some sustainable way better off makes a lot of empirical assumptions – none of which might hold in the real world. Without having a solid, empirically-based understanding of why the child is poor in the first place, we cannot know how best we can actually help. Simply sending money over may even make things worse. Think of aid dependency, or food aid that undercuts local producers, for example.

What this child requires is true development – economic and political development of his or her society, and it’s not at all clear to me that a transfer of money/wealth helps do that in any particular way. And, therefore, I think the solutions of the type he proposes, even though they seem appealing – after all we’re wealthy, why not transfer some of our money over there? – are neither necessarily effective nor the best solutions in the medium-term.

I think we have a responsibility to ensure that we are not part of the problem, that we are not supporting regimes that are responsible for that child’s poverty. But once you realise that your ability to make a lasting contribution to that child is actually quite limited as an empirical matter, then I think the simple impulse of just transferring part of your wealth isn’t a particularly productive one.

But there are some areas where my instincts would coincide with Singer’s, because I see a greater likelihood of practical impact.

For example?

You mentioned the difficulty of obtaining a work permit. This is probably one area where globalisation is both most unjust and most inefficient. On the basis of efficiency – economic efficiency – the greatest unexplored frontier of economic globalisation is mobility of workers around the world. Trade is substantially free, finance and capital are substantially free – but try to leave Bangladesh and go to work in the US. It’s impossible. If you wanted to both increase the efficiency of resource utilisation in the world economy and at the same time do something for the world’s poorest, there is nothing we could do that would have as big an impact as allowing some of the Bangladeshi workers to take up jobs in the advanced countries of the world. Now I wouldn’t go so far as to say you should allow complete mobility of labour, because I do think it’s appropriate for rich societies to put some weight on the consequences for their own workers. But I think we’re so far in the other corner, that certainly a smallish relaxation of these visa restrictions to allow more workers from poor countries to come and work in the rich countries would definitely be a good idea.

But that’s an example where globalisation really is going to clash with domestic politics because the idea of letting in more foreigners always seems to terrify people.

That’s right. But I would say that with labour mobility we are where we were with trade in the 1950s. We’ve substantially liberalised trade since the 1950s to the point where, quite frankly, it’s worthless to expend much effort to get the Doha Round going: we’ve eked as much as we can from the economic benefits of trade liberalisation. Except in a few areas, trade barriers are so low that it’s really hardly worth it any more. So I would redirect all that effort to try to construct domestic political bargains that might get us a little bit more labour mobility around the world.

On to your last choice, Karl Polanyi’s 1944 book, The Great Transformation.

The Great Transformation is the sort of book that you will only get after reading it three times. Well, that’s what happened to me. It’s one of these books that have the greatest reputation, but are in some sense hardest to read. But it’s worth reading. It’s really a history of the spread of markets, the spread of the gold standard. It makes a rather important point, especially if you have spent a lot of time studying economics. You tend to think of economics, or the economy, as an independent sphere of society, that economies tend to be self-standing and self-supporting, almost independent from the rest of society. Then you start to say ‘Politicians shouldn’t interfere in the economy, because it worsens resource allocation’, and things like that. What Polanyi’s work underscores is that this is never how an economy has actually worked historically. To use his terms, the economy has always been embedded in society, and that when we try to disembed it from society and treat it like an independent institution – ie not dependent on societies, values and other institutions – then we’re really going to run into trouble, political conflict, social and economic instability and some kind of backlash. I think the big lesson from Polanyi’s work is that, as we keep rethinking the institutions of economic globalisation, we need to ensure that those mechanisms are fundamentally responsive to the values and demands of society and that if we lose track of that, then we risk another set of instabilities and an eventual collapse of globalisation.

Do you want to give a specific example where this is particularly relevant right now?

I think the financial crisis we just went through is a very good illustration. For too long we lived off this fiction that financial markets could exist independently, that they could regulate themselves, and in this fashion they could be a foundation of wealth and well-being. What we found is that actually financial markets, left to themselves, are a very dangerous weapon. They need to be built on top of some very strong regulations and the moment you start talking about regulations then of course you have to ask: what are regulations for? That requires figuring out all sorts of questions. What are society’s values? How much income inequality is desirable or feasible? What should earning differentials be, how much is OK? How much should financiers/bankers earn that is OK? What role should finance play – supporting the real economy, as opposed to the real economy supporting finance? What is the right trade-off between financial innovation and financial stability? The more we allow finance to innovate, the less stability you’re potentially going to have because of the risks that are generated. And each society may have different answers to these questions, and that has very important implications, going forward, as to how much financial globalisation we’re going to have.

I would say that we are making a very big mistake to assume that we can go back to a world of extreme financial globalisation, because that’s inevitably going to leave the regulatory underpinnings of the system very weak; it’s going to set us up for another financial crisis in the future. I’d much rather see us being much less ambitious on financial globalisation and have much more sound regulation at the domestic, national level. So I think Polanyi’s book has very real implications for how we think about the future of financial globalisation.

So what does your own book recommend we do? Do you want to tell me a bit about it?

The book is also fairly historical. It goes back to the 17th century and talks about an early model of globalisation that was sustained by chartered trading companies. It describes the 19th century and the collapse of the gold standard and then comes to the present. Part of the book is historical, part of it is a survey of economists’ ideas about globalisation, and how they’ve gone back and forth from the silly to the more reasonable. It gently pokes fun at various economists, both dead and alive, for their ideas and I lay out what I call the political trilemma of the world economy. I say that of the following three things – national self-determination, political democracy and hyper-globalisation – we can have at most two, and that we need to make an explicit choice as to which two we want. Many of our troubles stem from the fact we seem to be pushing for all three things simultaneously. We want more economic globalisation, while we embrace democracy and our national sovereignty, and that’s an incompatibility of the first order.

And what do you advise?

I advocate giving up hyper-globalisation. It’s not an argument against globalisation per se, but it’s an argument against an extreme form of globalisation or pushing for increased globalisation. Because both democracy and national self-determination are also important values. We will have a better, safer, healthier economic globalisation if we accept – and do so explicitly – that democracy will remain mostly a national phenomenon, and that national self-determination is a value in and of itself, because each society has the right to select its own institutions and rules and regulations. And once you accept those, then you have to give up an extreme form of globalisation, and act accordingly.

But if you give up on deepening globalisation, don’t you make it harder for poor countries to develop? Isn’t it globalisation that has allowed a poor country like China to lift half a billion people out of poverty? How has China been able to do this? And why hasn’t it been replicated so well elsewhere?

I think every country that has been successful has managed to leverage globalisation with a domestic strategy. It’s always been a combination of a solid domestic growth strategy alongside the forces of globalisation. It is a careful, managed kind of globalisation that has worked. The countries that have simply opened themselves up to world trade and finance without a complementary growth strategy at home haven’t done that well.

Take China. Obviously without globalisation China wouldn’t have been able to grow as rapidly as it did. But China is not a simple story of letting globalisation work its magic. They, in fact, have opened up very gradually, very carefully and always after having established strengths in their domestic economy. It was on the basis of their domestic industrialisation that they progressively opened up to international trade and when they opened up to trade it was very partial too. It wasn’t ‘Let all the tariffs come down!’ It was through special economic zones, so only in parts of the country. They protected their state-owned enterprises so there wouldn’t be large-scale unemployment. They made sure foreign investors would transfer technology to their domestic counterparts. They entered the WTO relatively late, only after they had already become a manufacturing powerhouse. With respect to international finance, to this day they have capital controls, they prevent free inflow of capital and they’re intervening heavily to make sure that they have a very competitive currency – which effectively subsidises their exports and their manufacturing industry.

So China has had a combination of highly interventionist domestic policies to diversify and develop its industries alongside a policy of export-orientation and taking advantage of globalisation. This combination has been key. Other countries that have tried to take advantage of globalisation simply by lowering their barriers to trade and letting their capital flow freely such as the Latin American countries since the 1990s have actually done relatively poorly. 

It’s not a democracy but do you use China as an example in your book?

In my book I say that China has succeeded in globalisation because it has played the globalisation game by the Bretton Woods rules, referring to an earlier period in globalisation where there was a much better balance between the forces of globalisation on the one hand and room for domestic policy making on the part of national governments on the other. And I think those rules, the Bretton Woods rules, were and are much more conducive to successful economic development than those we’ve had since the 1990s – which progressively limit the role a national government can play in domestic restructuring.

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