Globalization and alternative globalizations

1. Globalization and alternative globalizations Dani Rodrik SW31/PED-233/Law School 2390 Spring 2013

2. Three building blocks • The extent of the market is limited by the scope of workable regulation/governance • A corollary to: Adam Smith’s “The division of labor is limited by the extent of the market.” • Markets need a wide range of non-market institutions.  They are not self-creating, self regulating, self stabilizing, self-legitimizing.   Markets cannot work properly and be politically sustained in their absence. •  The main locus of legitimate governance remains the nation state. • That is where democratic deliberation resides • Transnational forms of “global governance” likely to remain weak at best • There are legitimate differences across nation states on the shape that regulatory institutions ought to take • Differences in history, culture, levels of income result in divergences in needs and preferences

3. Therefore • We have to contend with a world economy that remains a patchwork in terms of governance • … and moderate our ambitions regarding economic globalization • We run one of two risks when we get the balance wrong: • Legitimacy/accountability deficit when we push global rules too far in the absence of true global governance • Inefficiency and instability when we push global markets too far • Recognizing the centrality of nation-states is more likely to contribute to a healthy global economy than trying to eviscerate it

4. The “globalization paradox”: China version (1) • History’s most successful poverty-reduction program would have been impossible without access to global markets • But China’s was a managed globalization: “open the window, but don’t forget the screen” • State enterprises, local-content requirements, subsidies, technology transfer requirements, managed currencies and capital flows, … • China succeeded because it never bought into the hyper-globalization model • It marched to its own drummer, its own rules • … none of this is to diminish the challenges that the Chinese economy faces going forward

5. The “globalization paradox”: China version (2) • Globalization works best when it is not pushed too far • when domestic policy authorities retain adequate policy space • Emerging markets version: • leveraging globalization requires active government policies to restructure economy • Advanced countries version: • legitimacy and efficiency both require effective regulatory state

6. The rich country perspective: global competition and the social compact Trade is both similar and dissimilar to domestic competition Similar insofar as it can create losers as well as gainers in the process of generating wider economic opportunities Dissimilar insofar as it forces competition under ground rules that have been prohibited at home (e.g., unfair labor practices, tax havens, subsidized goods, …) Such competition can undermine: • regulations (e.g., taxes, financial regulations, product safety rules) • domestic norms (“what’s an acceptable redistribution?”) • institutional practices (e.g., employer-employee bargaining)

7. We can respond by: • ignoring the problem and pushing for deeper globalization … at the cost of aggravating the undermining of domestic rules • harmonizing rules across countries … at the cost of imposing ill-fitting rules on all • restricting the scope of globalization … at the cost of giving up on some of the gains from trade … which brings us to a trilemma

8. The history of globalization viewed through the prism of a trilemma Hyper-globalization Golden Straitjacket National sovereignty The Gold Standard model: narrow domestic “policy space” in macro, financial, tax, structural and other domains to minimize impediments to free flow of capital and goods

9. The history of globalization viewed through the prism of a trilemma Hyper-globalization Golden Straitjacket Democratic politics National sovereignty Problem: historically, this model has not been compatible with democracy (Great Britain 1931, Argentina 2001, Greece today?) Thomas Friedman’s Coke and Pepsi analogy

10. The history of globalization viewed through the prism of a trilemma Hyper-globalization Democratic politics Nationalsovereignty Bretton Woods compromise The Bretton Woods compromise: enlarge space for democratic legitimacy and/or economic management at home Keynesian macro policies + welfare state + economic restructuring

11. The history of globalization viewed through the prism of a trilemma Hyper-globalization Democratic politics Nationalsovereignty Bretton Woods compromise An explicitly incomplete globalization: Keynes and capital controls; The GATT model in trade; China’s “screen”

12. The history of globalization viewed through the prism of a trilemma Hyper-globalization • Global • governance Democratic politics National sovereignty A third alternative: “global governance” Requires significant restraint on national self-determination and reduction in regulatory, institutional, and policy diversity

13. The political trilemma of the world economy Hyper-globalization Golden Straitjacket • Global • governance Democratic politics National sovereignty Bretton Woods compromise Pick two, any two

14. The political trilemma of the world economy: euro zone version European single market • Euro zone fiscal/political union Golden Straitjacket (Eurozone today) (The future?) Democratic politics National sovereignty Euro zone break-up (Increasingly likely?) • EU needs either more political union… • If it wants single market • … or less economic union • If it is unable to achieve political integration

15. Globally, national sovereignty isn’t withering away anytime soon… • The balance of global forces is becoming more centrifugal • Declining role of U.S. in global economy • EU likely to remain preoccupied with own matters • China and the other emerging powers place, if anything, greater emphasis on national sovereignty • The supply of global leadership will be in short supply

16. But this isn’t such a bad thing • The world economy is not a “global commons” • Open trade and finance polices are semi-private goods • (Misleading) analogy with climate change • where in the absence of global coordination, we get the “tragedy of the commons” • An open economy is in every country’s own interest • Subject to the terms of trade and mercantilist exceptions • When nation states have “policy room” the outcome need not be the slippery slope to protectionism • Democratic politics can “malfunction,” but it is locals who pay the bulk of the costs • e.g., agricultural subsidies • So improved deliberation at home is likely to be more powerful stick than external constraints

17. New traffic rules for the world economy • Countries have the right to protect their own social arrangements and institutions • But not to impose them on others • The objective of international economic arrangements must be to attain the maximum “thickness” in economic transactions (in trade and investment flows) that is consistent with maintaining space for diversity in national institutional arrangements. • Enable like-minded countries to deep integrate • When deep integration is not feasible or desirable, rely on traffic rules to manage interface among national institutional arrangements • These traffic rules must create “policy space” to allow: • rich nations to provide social insurance, address concerns about labor, environmental, health, and safety consequences of trade, and shorten the “chain of delegation” • poor nations to position themselves better for globalization through economic restructuring • all nations to create financial systems and regulatory structures more attuned to their own conditions and needs