Dani Rodrik, an economist at Harvard, has written extensively on international economic issues. He has also published an important book on the methodology of economics. The book on which I’m commenting in this post (The Globalization Paradox: Democracy and the Future of the World Economy, W.W. Norton, 2011)contains interesting and, in my opinion, correct analyses of issues related to the global economic framework and, in the process, criticizes the related policy positions of economists. The latter have frequently either resulted from an oversimplified analysis or have placed insufficient emphasis on important caveats of that analysis.

The thesis, stated in the introductory pages,  is that the world is faced with a “political trilemma”.  The ‘trilemma’ is that countries cannot have all three of democracy, national determination and economic globalization.  A choice must be made.

The present international economic order can be characterized as ‘hyperglobalizatio’.  Countries are increasingly constrained in their ability to craft economic and social policies to fit their own social, economic and political criteria. The World Trade Organization (WTO), which replaced the General Agreement on Tariffs and Trade (GATT) in the mid-90’s has increasingly liberalized trade among nations by reducing tariffs on both manufactured and primary goods and services. But, of critical importance, it has also allowedmember governments to be sued by foreign investors who face losses as a consequence of policy changes by those governments. Thus, it has increasingly constrained policy choices by member countries.

As a consequence nation states are being increasingly forced into what Rodrik terms a “golden straitjacket”; ‘golden’ because member nations are  being forced to play by rules that constrain domestic policy choices in a manner similar to that of the gold standard which prevailed in the 19th and early 20th centuries.  Under that standard nation states were constrained in their domestic policies by the need to maintain an exchange rate fixed in terms of gold. (A country with an international trade deficit could not eliminate the deficit by devaluing its exchange rate. It would be forced to do it by restricting domestic economic activity.)

So, Rodrik argues, we can have:

– hyper globalization and the nation state while sacrificing democracy (because democracy is incompatible with the increasing invasiveness of World Trade Organization -WTO – rules), or

– hyper globalization and democracy at the expense of the nation state – this would involve an “integrated global political community”, i.e. effectively the sacrifice of the nation state, or

– the nation state and democracy while giving up hyper globalization.

Rodrik argues persuasively that the first two of these options are clearly non starters.  Thus the only feasible course is to pull back from hyper globalization as it presently exists

He states: the paradox of globalization is that a thin layer of international rules, leaving room for much national decision making is better than a hyper globalization. In developing the argument he covers a lot of territory, from criticizing the contribution of economists to public discussion of the issues, to post WW II policies of economic development in Asian and African countries and what he terms the ‘Bretton Woods’ compromise – the post WW II international economic policy framework consisting of the International Monetary Fund and the General Agreement on Tariffs and Trade.

In developing his thesis Rodrik makes a number of points:

• The economic case for free trade:  Economists are known for touting its benefits but not so much for discussing the costs which are left for footnote or small print treatment.  Because free or freer trade results in changes in the nature and location of economic activity there are losers as well as winners.  Economists typically add a footnote stating that losers – companies facing bankruptcy and people thrown out of work or facing loss of income – can be compensated by the winners.  But this rarely happens and, if it does, it occurs on a much smaller scale than necessary. Moreover, distributional issues can be large relative to the gains and/or the losses are localized while the gains, if not small, are widespread.
• In the immediate post war period economic growth was strong and, though there were several rounds of tariff cutting under the GATT, countries retained the ability to respond to large disruptions. And there were no “Chinas, Koreas and Japans”.  Trade in manufactured goods was largely among already developed countries. The point is, Rodrik argues, that developing economies had the freedom to develop policies to promote the growth of manufacturing and reduce their dependence on natural resources.  This led to the development of the economies of such countries as South Korea, Taiwan and Japan. As Rodrik states: “In reality, trade became free only where it posed little challenge to domestic institutions, distributional preferences, or values”.
• Rodrik states that the GATT  represented what he calls ‘shallow integration’ whereas the WTO is ‘deep integration’: it interferes with domestic decision-making.
• In the 1980’s, with the election of Reagan in the US and Thatcher in the UK, free market ideology prevailed: “governments stood in the way of markets and had to be cut down to size”.
• The WTO, founded in 1995, “envisaged a significant ramping up of ambitions with respect to economic globalization and a dramatic rebalancing of nation states’ domestic and international responsibilities”.  Agriculture and some services (notably banking and intellectual property) became part of the trade agreement.
• In addition dispute settlement processes were introduced in which the decisions of an appellate court were final.
• The provisions of the WTO represented a substantial expansion of multilateralism and concern increased that decisions relating to its provisions increasingly reached into areas that legitimately belonged to the domestic policies of member countries.
• Concern is increasing that the income distribution effects of freer trade are becoming larger, increasing inequality, as manufacturing workers are displaced by imports from low wage countries.  Governments have not done a good job of compensating affected workers.
• With respect to financial markets, the belief gained currency that financial liberalization and international capital mobility were beneficial.
• Economists contributed to this belief by naively assuming that the simple model of perfect competition applied to financial markets.  It did not. As Rodrik correctly states: “The world is better served by syncretic economists and policy makers who can hold multiple ideas in their heads than by ‘one-handed’ economists who promote one big idea regardless of context.”
• With respect to developing economies, the East Asian economic stars got that way as a result of large scale government intervention using “mixed, pragmatic strategies”: import substituting industrialization worked!
• National democracy and “deep globalization” are incompatible.  The rules of such globalization constrain domestic policies. This is true in many areas such as labour standards, and health and safety regulation.
• “Probably the most significant external constraints that developing nations face as a consequence of hyper globalization are the restrictions on industrial policies that make it harder for countries  in Latin America, Africa, and elsewhere to emulate the development strategies that East Asian countries have employed to such good effect.”
• The post WW II system of international monetary and trading arrangements represented a compromise between national policies and international obligations.
• Some issues such as climate change, require an international policy; they are a “global commons”.  But others do not: international rules should not try to enforce common policies in all states across all areas.

Rodrik recommends that WTO rules be loosened to allow more national freedom to opt out in cases where they conflict with domestic norms and development priorities.

He would allow individual countries to regulate their own financial sectors, requiring foreign banks to follow domestic rules.

With respect to China he argues that, if WTO rules with respect to development policies were loosened, then that country would not need an undervalued currency as a policy tool.  (An undervalued currency makes Chinese goods cheaper to the rest of the world than they would otherwise be and foreign goods more expensive thus promoting exports and dampening imports.) This is a valid point but I’m not sure the likes of Mr. Trump would feel any better if an undervalued exchange rate were simply replaced by import restrictions or export subsidies of other kinds!

All in all an excellent and very readable discussion of some major international economic issues and many sensible policy recommendations. In my view he’s as good an analyst and writer as exists on today’s international economic issues.

Rodrik has expanded his views on economics in another book published in 2015 titled Economics Rules: The Rights and Wrongs of the Dismal Science – well worth a read.  And he has recently published a book on international trade:  Straight Talk on Trade:Ideas for a Sane Economy which I look forward to reading.