naked capitalism

Even though Greg Mankiw claims in the New York Times today that ” Economists are nearly unanimous in their support of an unfettered system of world trade,” another Harvard economics professor begs to differ.

Dani Rodrik, writing for Project Syndicate, finds that some prominent former staunch advocates of liberalized trade regimes are having serious doubts to the point that they are actually airing them in public. The big issue appears to be – surprise – that trade is not delivering the benefits in practice that it is alleged to produce in theory.

And worse, as Rodrik has noted at his blog, the benefits in theory are often exaggerated. We wrote about one such discussion:

The debate among Serious Economists about the benefits of free trade continues, and Dani Rodrik continues to take a dispassionate look at the data and the models.

This post, although a bit geeky, is intriguing because Rodrik dissects an analysis cited by Bernanke in a recent speech, which found that the benefits of free trade per US household since World War II are roughly $10,000, and full liberalization would generate another $4,000 to $12,000 per HH. Rodrik finds those numbers to be “grossly inflated” and explains why in “The Globalization Numbers Game.”

At the end of the post, Rodrik chides his peers for goosing numbers to make their case:

What puzzles me is not that papers of this kind exist, but that there are so many professional economists who are willing to buy into them without the critical scrutiny we readily deploy when we confront globalization’s critics. It should have taken Ben Bernanke no longer than a few minutes to see through Bradford et al. and to understand that it is a crude piece of advocacy rather than serious analysis. I bet he would not have assigned it to his students at Princeton. Why are we so ready to lower our standards when we think it is in the service of a good cause?

There is a simple answer: because with honest numbers, the case may not be compelling. These models (as I understand them, which admittedly may not be perfectly) rest on certain assumptions, many of which do not operate in practice. Thus, there is the real possibility that adjusting any model’s results to more closely approximate real world conditions may reduce (or improve) the theoretical benefits to open trade. Give that many observers believe that America’s free trade deals tend to favor its corporations rather than the population as a whole, it seems more likely than not that any rectification of theory to reality would lower the level of benefits.

There may be another cause for pause as far as unqualified support for more open trade is concerned. Research into financial crises by Kenneth Rogoff and Carmen Reinhart has found that:

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

High levels of international trade is a necessary, although perhaps not a sufficient condition for high international capital mobility (reader views on this point in particular would be of interest).

Now, from Rodrik’s article at Project Syndicate:

The world economy has seen globalisation collapse once already. The gold standard era – with its free capital mobility and open trade – came to an abrupt end in 1914 and could not be resuscitated after the First World War. Are we about to witness a similar global economic breakdown?

The question is not fanciful. Although economic globalisation 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 rests on shaky pillars.

Unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only “weakly embedded”.

There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.

Recent events have heightened the urgency with which these issues are discussed. The presidential electoral campaign in the United States has highlighted the frailty of the support for open trade in the world’s most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes.

Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.

So if globalisation is in danger, who are its real enemies? There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth. Meanwhile, they regarded themselves as the true progressives, because they understood that safeguarding and advancing globalization was the best remedy against poverty and insecurity.

But that self-assured attitude has all but disappeared, replaced by doubts, questions, and scepticism. Gone also are the violent street protests and mass movements against globalisation. What makes news nowadays is the growing list of mainstream economists who are questioning globalisation’s supposedly unmitigated virtues.

So we have Paul Samuelson, the author of the post-war era’s landmark economics textbook, reminding his fellow economists that China’s gains in globalisation may well come at the expense of the US; Paul Krugman, today’s foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration’s “Mr Globalisation”, musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.

While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate. Moreover, even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalisation go.

For example, Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation’s ills and under-appreciate its benefits. But their debates on the merits of regional trade agreements – Bergsten for, Bhagwati against – are as heated as each one’s disagreements with the authors mentioned above.

None of these intellectuals is against globalisation, of course. What they want is not to turn back globalisation, but to create new institutions and compensation mechanisms – at home or internationally – that will render globalisation more effective, fairer, and more sustainable.

Their policy proposals are often vague (when specified at all), and command little consensus. But confrontation over globalisation has clearly moved well beyond the streets to the columns of the financial press and the rostrums of mainstream think tanks.

That is an important point for globalisation’s cheerleaders to understand, as they often behave as if the “other side” still consists of protectionists and anarchists.

Today, the question is no longer: “Are you for or against globalisation?” The question is: “What should the rules of globalisation be?” The cheerleaders’ true sparring partners today are not rock-throwing youths but their fellow intellectuals.

The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multi-lateralism that permitted policy-makers to focus on domestic social and employment needs, while enabling global trade to recover and flourish. This regime was superseded in the 1980’s and 1990’s by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.