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For a century, economists have driven forward the cause of globalization in financial institutions, labour markets, and trade. Yet there have been consistent warning signs that a global economy and free trade might not always be advantageous. Where are the pressure points? What could be done about them? Dani Rodrik examines the back-story from its seventeenth-century origins through the milestones of the gold standard, the Bretton Woods Agreement, and the Washington Consensus, to the present day. Although economic globalization has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it is a concept that rests on shaky pillars, he contends. Its long-term sustainability is not a given. The heart of Rodrik>'s argument is a fundamental 'trilemma': that we cannot simultaneously pursue democracy, national self-determination, and economic globalization. Give too much power to governments, and you have protectionism. Give markets too much freedom, and you have an unstable world economy with little social and political support from those it is supposed to help. Rodrik argues for smart globalization, not maximum globalization.
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11 of 11 people found the following review helpful
Format:Hardcover
Dani Rodrik, Professor of International Political Economy at Harvard University, argues against financial globalisation and for countries to put their people first through industrial policy. He points out that the Bretton Woods system was built on the belief that countries' domestic needs would and should trump the global economy's demands.
Countries that rely on international finance do poorly. He writes, "The benefits of globalisation come to those who invest in domestic social capabilities. These investments in turn require some degree of support for domestic firms - protective tariffs, subsidies, undervalued currencies, cheap funding, and other kinds of government assistance ... The deep integration model of globalisation overlooks this imperative. By restricting in the name of freer trade the scope for industrial policies needed to restructure and diversify national economies, it undercuts globalisation as a positive force for development."
As Rodrik notes, "National democracy and deep globalisation are incompatible." Governments cannot meet both the demands of foreign creditors and the needs of their own people.
He argues against trade fundamentalism, as expressed in World Trade Organization rules and in World Bank and IMF practice. Fixed exchange rates and capital mobility both enslave countries to other countries' monetary policies. Opening up to foreign economic intervention means facing greater risks, and less growth. More capital inflows do not mean more growth.
In 1991, Argentina's Convertibility Law tied the peso to the dollar, strangling the economy, just as the euro is doing to Greece, Portugal, Cyprus, Italy and Spain. In 2001-2, Argentina defaulted on its foreign debt, reimposed capital controls, devalued the peso, froze utility prices, increased social spending, improved its tax collection and created import substitution industries. The markets screamed, but Argentina's economy grew by 63 per cent in six years, pulling 11 million people out of poverty.
Countries that rely on international finance do poorly. He writes, "The benefits of globalisation come to those who invest in domestic social capabilities. These investments in turn require some degree of support for domestic firms - protective tariffs, subsidies, undervalued currencies, cheap funding, and other kinds of government assistance ... The deep integration model of globalisation overlooks this imperative. By restricting in the name of freer trade the scope for industrial policies needed to restructure and diversify national economies, it undercuts globalisation as a positive force for development."
As Rodrik notes, "National democracy and deep globalisation are incompatible." Governments cannot meet both the demands of foreign creditors and the needs of their own people.
He argues against trade fundamentalism, as expressed in World Trade Organization rules and in World Bank and IMF practice. Fixed exchange rates and capital mobility both enslave countries to other countries' monetary policies. Opening up to foreign economic intervention means facing greater risks, and less growth. More capital inflows do not mean more growth.
In 1991, Argentina's Convertibility Law tied the peso to the dollar, strangling the economy, just as the euro is doing to Greece, Portugal, Cyprus, Italy and Spain. In 2001-2, Argentina defaulted on its foreign debt, reimposed capital controls, devalued the peso, froze utility prices, increased social spending, improved its tax collection and created import substitution industries. The markets screamed, but Argentina's economy grew by 63 per cent in six years, pulling 11 million people out of poverty.
10 of 11 people found the following review helpful
Format:Hardcover|Amazon Verified Purchase
Dani Rodriks's new book is a very interesting - and rather alarming - look at the current state of globalization. His basic proposition is that we are currently experiencing the:
'fundamental political trilemma of the world economy: we cannot simultaneously pursue democracy, national determination, and economic globalization. If we want to push globalization further, we have to give up either the nation state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation state and international economic integration. And if we want to keep the nation state and self-determination, we have to choose between deepening democracy and deepening globalization. Our troubles have their roots in our reluctance to face up to these ineluctable choices.' (Introduction P XVII-XIX)
Over the course of the following twelve chapters, Rodrik gives us a history of globalization and free trade (pre- and post-World War 1), a consideration of the economic theories and policies that have affected the responses to them (Keynes, Bretton Woods, GATT, WTO, the 'Washington Consensus' etc.) and a look at specific national responses to globalization (South Korea, China, Argentina, South Africa amongst others), before returning to and expanding on his theme of the 'Political Trilemma' (Chapter 9). Finally, he makes a number of proposals for the design of 'Capitalism 3.0' (Chapter 11) before looking forward to 'A Sane Globalization' (Chapter 12).
Initially, Rodrik examines the relationship between states and markets. He suggests that '...markets are not self-creating, self-regulating, self-stabilizing, or self-legitimizing.' (P22 in italics) He continues: 'If states are indispensable to the operation of national markets, they are also the main obstacle to the establishment of global markets'. (P22)
Thus we see the beginnings of the 'trilemma'. Global markets fall between national regulatory systems. One solution to this, historically, was mercantilism (P23).
The first great era of globalization, prior to the First World War, Rodrik suggests, was down to a number of factors - new technologies played a major part, but so did a growing acceptance of Adam Smith's ideas, leading to a desire to reduce tariffs and other 'transactional costs'. However, the reduction of these costs was also largely down to imperialism which helped to minimise the 'regulatory gaps' between nations. Even so, the actual period of 'free trade' was relatively brief - roughly the 1860's and 1870's (P26). The fact is that the role of the nation state was always crucial, always underpinned 'free trade'. It is not simply a question of removing the state from the picture - 'free trade' cannot exist without the state. The relationship between the two is complex, subtle and quite inextricable.
Rodrik examines the relationship between the state, civil society, free trade and globalization in detail in Chapter 3. He also criticises his fellow economists:
'When economists oversell globalization by presenting an incomplete case for it, they not only lose an opportunity to educate the public, they also lose credibility. They become viewed as advocates or as hired guns for the "stateless elites" whose only interest is to remove impediments to their international operations.' (P66)
Rodrik next considers the Bretton Woods agreement and the development of a limited form of globalization post-World War 2. He, like many economists, sees this as a golden era for which Keynes and Harry Dexter White were largely responsible. Rodrik sums up Keynes' views on globalization as:
'Unqualified commitment to free trade was feasible only when societies were ruled by narrow technocracies with faith in a uniform type of capitalism. It ceased to be practical, or even desirable, in a world where nations were experimenting with alternative visions of political economy.' (P68)
Again, an indication of the 'trilemma'.
Freeing up trade in goods, Rodrik believes, has largely been a 'good thing'. But it was with the freeing up of finance that things started going awry. With the 'stagflation' of the 70s and the subsequent move towards 'supply side' economics and floating exchange rates, capital became 'excessively' mobile. This caused huge problems: in Latin America, Mexico, Europe, South East Asia (1997-8), Russia (1998), Brazil (1999), Argentina (2000), Turkey (2001). (See Naomi Klein for an alternative perspective on this).
It turns out that those countries that were most successful, as has been noted many times before (Roubini, Stiglitz et al), were those who precisely did not open up their economies to the vagaries of globalization; South Korea, Taiwan, India and, of course, China, have all protected their fledgling industries, ensuring their establishment before opening them up to international competition. Rodrik specifically rejects Tom Friedman's contention that donning a 'Golden Straightjacket' of 'free trade, free capital markets, free enterprise and small government' (P189) was the only way to successful economic progress. But:
'...Friedman's central insight remains valid. There is a fundamental tension between hyperglobalization and democratic politics. Hyperglobalization does require shrinking domestic politics and insulating technocrats from the demands of popular groups. Friedman erred when he overstated the economic benefits of hyperglobalization and underestimated the power of politics. He therefore overestimated the long-run feasibility, as well as desirability, of deep integration.' (P189-190)
Again, we see the 'trilemma' raising its head, again we see the tension between national democracies and global markets. And globalization is not yet complete. Although trade and finance are pretty well globalized, there is a third area that has barely begun the process - and that is labour.
Finally, Rodrik moves on to possible ways forward. Admitting that a global government is unlikely to arrive any time soon, his solution is essentially to limit the scope of globalization, promoting the importance of democratic national governments over the demands of, as he puts it, hyperglobalization, even at the expense of efficient markets. He expands on these ideas in 'Designing Capitalism 3.0'.
Whether you think that these proposals are feasible or not, judge for yourself. Making markets subservient to local/national regulatory systems will inevitably increase 'transaction costs' but if this means a 'saner' globalization surely this is a price worth paying.
However, some of his proposals struck me as simply unrealistic. In particular, I was not impressed with his proposals regarding labour. He suggests that workers from developing countries should be allowed temporary (five year) visas to come and work in richer countries. To avoid these workers overstaying, the visas should work on a 'one in, one out' basis, so that the worker would have to return to their country in order to allow another worker the opportunity.
At this point, I think it would be an idea to read 'Immigrant Nations'. Will these workers be allowed to bring their families with them? If such a worker brings a child with them, that child will be educated in the host country for the duration of their stay. What of the cultural differences? If such a worker was to start a family in the host country during their five year period, will the whole family return? In a labour market which is increasingly 'hour glass shaped', (see Owen Jones, amongst others) these workers will most likely be either highly skilled professionals or un/semi-skilled workers who will push down the value of wages in the host country, making them an inevitable source of tension.
Overall, this is a very readable book, making many valid points. But in the end, I was unconvinced. Quite frankly, I think it's too late. As I've said elsewhere, I believe that the Goldman Sachs Vampire Squid and the Kleptocracy (a.k.a. "stateless elites") have got far too firm a hold and we are more likely to see the rise of a new form of feudalism. In the end, hyperglobalization is just another Road to Serfdom. We are so doomed.
Sorry. :-)
'fundamental political trilemma of the world economy: we cannot simultaneously pursue democracy, national determination, and economic globalization. If we want to push globalization further, we have to give up either the nation state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation state and international economic integration. And if we want to keep the nation state and self-determination, we have to choose between deepening democracy and deepening globalization. Our troubles have their roots in our reluctance to face up to these ineluctable choices.' (Introduction P XVII-XIX)
Over the course of the following twelve chapters, Rodrik gives us a history of globalization and free trade (pre- and post-World War 1), a consideration of the economic theories and policies that have affected the responses to them (Keynes, Bretton Woods, GATT, WTO, the 'Washington Consensus' etc.) and a look at specific national responses to globalization (South Korea, China, Argentina, South Africa amongst others), before returning to and expanding on his theme of the 'Political Trilemma' (Chapter 9). Finally, he makes a number of proposals for the design of 'Capitalism 3.0' (Chapter 11) before looking forward to 'A Sane Globalization' (Chapter 12).
Initially, Rodrik examines the relationship between states and markets. He suggests that '...markets are not self-creating, self-regulating, self-stabilizing, or self-legitimizing.' (P22 in italics) He continues: 'If states are indispensable to the operation of national markets, they are also the main obstacle to the establishment of global markets'. (P22)
Thus we see the beginnings of the 'trilemma'. Global markets fall between national regulatory systems. One solution to this, historically, was mercantilism (P23).
The first great era of globalization, prior to the First World War, Rodrik suggests, was down to a number of factors - new technologies played a major part, but so did a growing acceptance of Adam Smith's ideas, leading to a desire to reduce tariffs and other 'transactional costs'. However, the reduction of these costs was also largely down to imperialism which helped to minimise the 'regulatory gaps' between nations. Even so, the actual period of 'free trade' was relatively brief - roughly the 1860's and 1870's (P26). The fact is that the role of the nation state was always crucial, always underpinned 'free trade'. It is not simply a question of removing the state from the picture - 'free trade' cannot exist without the state. The relationship between the two is complex, subtle and quite inextricable.
Rodrik examines the relationship between the state, civil society, free trade and globalization in detail in Chapter 3. He also criticises his fellow economists:
'When economists oversell globalization by presenting an incomplete case for it, they not only lose an opportunity to educate the public, they also lose credibility. They become viewed as advocates or as hired guns for the "stateless elites" whose only interest is to remove impediments to their international operations.' (P66)
Rodrik next considers the Bretton Woods agreement and the development of a limited form of globalization post-World War 2. He, like many economists, sees this as a golden era for which Keynes and Harry Dexter White were largely responsible. Rodrik sums up Keynes' views on globalization as:
'Unqualified commitment to free trade was feasible only when societies were ruled by narrow technocracies with faith in a uniform type of capitalism. It ceased to be practical, or even desirable, in a world where nations were experimenting with alternative visions of political economy.' (P68)
Again, an indication of the 'trilemma'.
Freeing up trade in goods, Rodrik believes, has largely been a 'good thing'. But it was with the freeing up of finance that things started going awry. With the 'stagflation' of the 70s and the subsequent move towards 'supply side' economics and floating exchange rates, capital became 'excessively' mobile. This caused huge problems: in Latin America, Mexico, Europe, South East Asia (1997-8), Russia (1998), Brazil (1999), Argentina (2000), Turkey (2001). (See Naomi Klein for an alternative perspective on this).
It turns out that those countries that were most successful, as has been noted many times before (Roubini, Stiglitz et al), were those who precisely did not open up their economies to the vagaries of globalization; South Korea, Taiwan, India and, of course, China, have all protected their fledgling industries, ensuring their establishment before opening them up to international competition. Rodrik specifically rejects Tom Friedman's contention that donning a 'Golden Straightjacket' of 'free trade, free capital markets, free enterprise and small government' (P189) was the only way to successful economic progress. But:
'...Friedman's central insight remains valid. There is a fundamental tension between hyperglobalization and democratic politics. Hyperglobalization does require shrinking domestic politics and insulating technocrats from the demands of popular groups. Friedman erred when he overstated the economic benefits of hyperglobalization and underestimated the power of politics. He therefore overestimated the long-run feasibility, as well as desirability, of deep integration.' (P189-190)
Again, we see the 'trilemma' raising its head, again we see the tension between national democracies and global markets. And globalization is not yet complete. Although trade and finance are pretty well globalized, there is a third area that has barely begun the process - and that is labour.
Finally, Rodrik moves on to possible ways forward. Admitting that a global government is unlikely to arrive any time soon, his solution is essentially to limit the scope of globalization, promoting the importance of democratic national governments over the demands of, as he puts it, hyperglobalization, even at the expense of efficient markets. He expands on these ideas in 'Designing Capitalism 3.0'.
Whether you think that these proposals are feasible or not, judge for yourself. Making markets subservient to local/national regulatory systems will inevitably increase 'transaction costs' but if this means a 'saner' globalization surely this is a price worth paying.
However, some of his proposals struck me as simply unrealistic. In particular, I was not impressed with his proposals regarding labour. He suggests that workers from developing countries should be allowed temporary (five year) visas to come and work in richer countries. To avoid these workers overstaying, the visas should work on a 'one in, one out' basis, so that the worker would have to return to their country in order to allow another worker the opportunity.
At this point, I think it would be an idea to read 'Immigrant Nations'. Will these workers be allowed to bring their families with them? If such a worker brings a child with them, that child will be educated in the host country for the duration of their stay. What of the cultural differences? If such a worker was to start a family in the host country during their five year period, will the whole family return? In a labour market which is increasingly 'hour glass shaped', (see Owen Jones, amongst others) these workers will most likely be either highly skilled professionals or un/semi-skilled workers who will push down the value of wages in the host country, making them an inevitable source of tension.
Overall, this is a very readable book, making many valid points. But in the end, I was unconvinced. Quite frankly, I think it's too late. As I've said elsewhere, I believe that the Goldman Sachs Vampire Squid and the Kleptocracy (a.k.a. "stateless elites") have got far too firm a hold and we are more likely to see the rise of a new form of feudalism. In the end, hyperglobalization is just another Road to Serfdom. We are so doomed.
Sorry. :-)
4 of 5 people found the following review helpful
Format:Hardcover|Amazon Verified Purchase
There are two good reviews already on here for this book making points which I would mostly agree with, so I will attempt to complement and not repeat what has been said. To get the negative out of the way first, one such opinion i share is about the crazy ideas he has about increasing labour immigration into rich countries, which to me is the only blemish in an otherwise excellent book.
Also mentioned by another reviewer, is the relevance which the central premise of this book has to the current issues faced by the Euro Zone. Firstly this book is very strong in dealing with economic history, such as that of the gold standard which especially provides a fertile area for analogies with the current Euro problems. Also he provides a fresh (to me at least) positive appraisal of the strengths of the more measured Bretton Woods approach to international economic relationships of the last generation. He convincingly explains how the more sophisticated former status quo allowed for more "wiggle room" for national economies, compared to the attempted "deep globalisation" of present times.
Consider the situation in Europe as this is being written; Firstly Greece and to an extent Italy has had its elected politicians replaced and / or dictated to by financial technocrats. Secondly the financial elites across Europe and the world are urging Germany to underwrite the weaker countries through the ECB, but the public opinion of the German electorate are holding back this process. And thirdly widespread conclusions are being drawn that continued economic integration requires tighter political integration, to prevent and deal with these regional divergences and conflicting interests. These three issues support the central premise of this book that there is indeed a "Trilemma".
This book is also very strong on explaining China's role. At one point he describes how China was forced to reduce it's instances of blatant Industrial Policy as a requirement for joining the WTO in 2001, and he draws the conclusion that the gross undervaluing of their currency started seriously also at this time. This is because he claims having a grossly undervalued currency is a broad replacement for having instances of Industrial Policy targeting specific individual exporting industries and firms. He also claims that China would experience 2% pa less growth if it corrected the value of its currency! Why isn't everyone talking about this issue more?!! The side effects of China's undervalued currency policy both in competitive terms and its requirement to buy up assets (most significantly US govt debt) and lending cheap money can be argued to be the single biggest factor in the economic world right now, and central to all our recent and current problems.
On free trade he hits the nail on the head when he discusses the elitist attitude of the "economists club", who between themselves recognise the complex pro's and con's of free trade, but to the general public seek to gloss over the issues in order to protect their "crown Jewel" theory of comparative advantage. He also discusses how big the redistribution effects are compared to the gains from freer trade. In other words the gains are small compared to the volume of the jobs lost and new jobs created, and compared to the incomes reduced and incomes increased.
One slightly grey area of this book is the conclusions it arrives at regarding trade policies. He retains the habit of mainstream economists of considering protectionism as a very dirty word, but subsequently suggests actions and improvements to the system such as using more "safeguards" which sound to me pretty much like ... um ... protectionism? Come on Dani, come out of the closet! Just repeat after me, I am a protectionist and I am proud!
Also mentioned by another reviewer, is the relevance which the central premise of this book has to the current issues faced by the Euro Zone. Firstly this book is very strong in dealing with economic history, such as that of the gold standard which especially provides a fertile area for analogies with the current Euro problems. Also he provides a fresh (to me at least) positive appraisal of the strengths of the more measured Bretton Woods approach to international economic relationships of the last generation. He convincingly explains how the more sophisticated former status quo allowed for more "wiggle room" for national economies, compared to the attempted "deep globalisation" of present times.
Consider the situation in Europe as this is being written; Firstly Greece and to an extent Italy has had its elected politicians replaced and / or dictated to by financial technocrats. Secondly the financial elites across Europe and the world are urging Germany to underwrite the weaker countries through the ECB, but the public opinion of the German electorate are holding back this process. And thirdly widespread conclusions are being drawn that continued economic integration requires tighter political integration, to prevent and deal with these regional divergences and conflicting interests. These three issues support the central premise of this book that there is indeed a "Trilemma".
This book is also very strong on explaining China's role. At one point he describes how China was forced to reduce it's instances of blatant Industrial Policy as a requirement for joining the WTO in 2001, and he draws the conclusion that the gross undervaluing of their currency started seriously also at this time. This is because he claims having a grossly undervalued currency is a broad replacement for having instances of Industrial Policy targeting specific individual exporting industries and firms. He also claims that China would experience 2% pa less growth if it corrected the value of its currency! Why isn't everyone talking about this issue more?!! The side effects of China's undervalued currency policy both in competitive terms and its requirement to buy up assets (most significantly US govt debt) and lending cheap money can be argued to be the single biggest factor in the economic world right now, and central to all our recent and current problems.
On free trade he hits the nail on the head when he discusses the elitist attitude of the "economists club", who between themselves recognise the complex pro's and con's of free trade, but to the general public seek to gloss over the issues in order to protect their "crown Jewel" theory of comparative advantage. He also discusses how big the redistribution effects are compared to the gains from freer trade. In other words the gains are small compared to the volume of the jobs lost and new jobs created, and compared to the incomes reduced and incomes increased.
One slightly grey area of this book is the conclusions it arrives at regarding trade policies. He retains the habit of mainstream economists of considering protectionism as a very dirty word, but subsequently suggests actions and improvements to the system such as using more "safeguards" which sound to me pretty much like ... um ... protectionism? Come on Dani, come out of the closet! Just repeat after me, I am a protectionist and I am proud!
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