Taming globalization

Harvard’s Dani Rodrik is one of the most perceptive U.S. commentators on international trade and investment. For more than a dozen years, as signaled by the title of one of his earlier books, Has Globalization Gone Too Far?, Rodrik has questioned antiseptic depictions by other academic economists of a global economy bound to flourish if comprised of minimally regulated national economies. Events have proved him right to do so.

The title of another of Rodrik’s books, One Economics, Many Recipes, summarizes equally succinctly the perspective underlying The Globalization Paradox: Countries with economic development policies as different as those of China, Germany, and South Korea have been successful in boosting productivity, wages, and living standards over considerable time periods. The observation would be banal coming from anyone but an economist.

At the analytical core of The Globalization Paradox, Rodrik identifies irreconcilable tensions among national sovereignty, democracy, and hyperglobalization, this last term signifying an international economy deeply integrated and lightly regulated. Rodrik believes that any two of these can coexist, but not all three. Domestic politics in sovereign states leads to restrictions on trade and investment as capital and labor maneuver to protect market positions and jobs. Sovereign states can accommodate deep globalization only by attenuating the free play of domestic politics. The world can have both democracy and hyperglobalization only if states give up a measure of their sovereignty to supranational authorities.

Rodrik concludes that the only palatable combination of these three goals is globalization fettered to some extent by restrictive trade policies, capital controls, and economic regulations, a description that fits the world economy during most of the 20th century. He would like to find a way back to some such regime, while minimizing the excesses of the 1920s and 1930s and the negative consequences of trade restrictions and anticompetitive regulations for productivity, efficiency, and growth.

The path to globalization

Rodrik argues that the “trilemma” involving national sovereignty, democracy, and hyperglobalization stems from the unfilled vacuum created beginning in the 1970s with the crumbling of the Bretton Woods arrangements that emerged at the end of World War II and created the World Bank and International Monetary Fund (IMF). The General Agreement on Tariffs and Trade (GATT) emerged several years later as the intended bridge to a more comprehensive International Trade Organization. In the United States, however, Senate support for treaty approval could not be found, even for membership in the GATT. The United States participated only as a signatory until the World Trade Organization (WTO) finally superseded GATT in the mid-1990s.

Because the trade regime that emerged from Bretton Woods was initially so weak, globalization was slow to emerge. For several decades after World War II, national governments had considerable freedom to manage, or mismanage, trade because GATT was at first full of loopholes and exceptions. Countries could easily channel investment to favored sectors or even to individual firms, and otherwise implement industrial policies. Japan did so, as did rapidly developing economies such as Taiwan and South Korea, each in its own way.

Over time, successive rounds of multilateral trade negotiations under GATT auspices tightened or closed off many of the early exceptions to open trade, nibbling away at the policy tools available to member governments. Many multinational businesses favored this agenda. Economists supplied rhe torical support, theoretical justification, and applause. So did the subset of political scientists who took the view that government failure was more common and more consequential than market failure. Global economic integration deepened.

Deregulation had begun as World War II ended, with the United States and other governments relaxing or removing wartime controls over production, prices, and the labor market. The deregulatory push continued once it became plain that no return to the Great Depression of the 1930s was imminent, and after the mid-1970s, it strengthened markedly. In the United States, wartime production miracles had burnished the credibility of the big industrial corporations that dominated the economy. Business leaders resumed the insistent push for freedom of action and absence of accountability that had been part of the ethos of capitalism from its beginnings, set aside only temporarily during depression and war. At the same time, technological change accelerated, spurred by military innovations motivated by cold war competition.

The 1970s opened with the Nixon administration decoupling the dollar from gold, allowing it to depreciate so as to improve the competitiveness of U.S. exports, thus undermining the Bretton Woods agreement. The decade ended with completion of the Tokyo Round of trade negotiations. Earlier GATT rounds having cut tariffs to generally low levels, the Tokyo Round addressed nontariff barriers, such as the negotiated quotas that from 1969 to 1974 limited U.S. imports of steel from Japan and the European Economic Community. The Uruguay Round followed, with negotiators turning to trade in services, including financial services, even though these were poorly understood compared to trade in goods and many nonfinancial services, and the waves of innovation that followed meant that the opacity of many financial markets increased even as greater effort went into exploring their workings. The Uruguay Round also led, finally, to the formation of the WTO, which incorporated the more comprehensive structure for the governance of trade and investment envisioned in the 1940s.

Already the infamous tuna-dolphin case had brought the implications of globalization home to many Americans in ways that seemed quite different from restrictions on imports of steel or apparel. When the United States tried to bar imports of tuna that were caught using techniques that were illegal in the United States because they resulted in the death of many dolphins, a GATT panel ruled the U.S. action an unfair trade practice. The case reified for environmentalists and many others the challenge to democratic decisionmaking and sovereignty posed by the emerging trade regime. At the same time, more Americans were beginning to see in wage stagnation and “deindustrialization” unadvertised consequences of free trade and globalization, while Europeans worried over jobless growth, and many developing countries continued to regard international economic affairs as a game rigged to their disadvantage.

A new framework?

In Rodrik’s view, the world continues to grapple, blindly, with the stresses and strains of the unresolved trilemma he describes. The post-2007 slump showed hyperglobalization to be a recipe for instability and in many countries for growing inequality. Today, for instance, the 17 members of the European Union (EU) that adopted the euro find themselves trying to cope with still-spreading disarray triggered by Greece, which piled up debt and now cannot devalue its currency as it once would have. Yet the EU and the eurozone bloc within it remain anomalous. Rather than consolidating, states continue to fragment as a result of conflict among national groups. The number of sovereign states is increasing, and more of them merit the appellation nation-state. If all politics is local, the notion of some sort of globalized democracy must seem nonsensical; there are too many billions of people with too many local interests. If hyperglobalization implies economic instability (or perhaps more precisely, a set of dynamics embodying a greater number of possible metastable suboptimal equilibria), and if no one wants to pull back from national democratic politics and sovereignty (except perhaps a few remnant idealists and prototycoons bent on monopolization), then it is hyperglobalization that must give way. The question becomes: What sort of new framework to seek?

Rodrik’s answer envisions a world of sovereign democratic states coupled loosely through networks of international agreements on discrete areas such as environmental protection, labor standards, and immigration. No longer would an unaccountable body such as the WTO, with its legalistic panels and proceedings and a staff of true believers, be delegated to decide tradeoffs between conflicting goals such as free trade and the protection of dolphins. Within agreed limits, states could set their own rules and require that imports meet them. Poor nations would be free to claim that, for them, child labor represented a lesser evil than large numbers of young people neither attending school nor working, but they could not expect the world to be fully open to goods so produced because importing countries would be free to bar the products of child labor. National governments would have a freer hand in adopting and implementing economic and industrial policies, irrespective of IMF and World Bank strictures.

If much of this seems rather schematic, it is because Rodrik leaves two nodes in his tripartite analysis schematic. He delves deeply into international economics, but not into sovereignty or democracy. Both of these, and especially democracy, come in shades and degrees that he does not explore. As a result, readers get little help in trying to puzzle through the implications of some of his proposals.

Similarly, in Rodrik’s discussion of global governance, one searches vainly for meaningful alternatives other than some form of adult one-vote “democracy” on a worldwide basis and an anarchic global system of the sort depicted by realist students of international relations in which a collection of sovereign states pursue mandarin-defined interests in the absence of supranational authority, or even widely accepted norms of behavior. Yet the actual world system today is one in which sovereignty for all but a few states depends on adherence to some such set of behavioral norms. After all, if the economic and military power of the United States were to be controlled by a less predictable government, only a bare handful of other countries could have reasonable confidence in their existential security. Yet U.S. behavior is predictable, relatively speaking (and not excepting the 2003 invasion of Iraq) because of carefully crafted constitutional design that serves as a guarantor of weak central authority, making militaristic takeover of foreign policy nearly inconceivable.

Rodrik would no doubt acknowledge that there are many recipes for democracy, but in contrast to his extensive and well-documented treatment of international trade and investment, he has little to say on the subject. Nor does he always tell us where he himself comes down on questions such as how the power of business groups in the United States and elsewhere has shaped the globalization agenda, or how to remedy the impotence of the International Labor Organization.

Readers who value Rodrik’s insights into globalization may hope that in his next book he will dig more deeply into notions of sovereignty and democracy and how they might evolve in the world system of the future.