Dani Rodrik: "Death of globalisation consensus"

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.

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  1. Anonymous

    “All debt and no savings means that there’s Hell to pay; call it Faustian capitalism”

    At the macroecnomic level, debt and savings are completely independent, non-comparable dimensions. Debt is financial. Savings is real. It is possible to have lots of debt and lots of savings. If you’re talking about distribution, you mean less debt in aggregate, but that doesn’t necessarily mean more savings. In fact, they’re non-comparable dimensions at the microeconomic level. The marginal real net savings effect of debt is 0 – negative savings for the borrower; positive savings for the lender. This includes households, business, government, and the financial sector.

  2. Richard Kline

    The reasons why I have been, and remain accepting of economic globalisation if not supportive is that the process was likely to improve the wealth and life of many inhabitants in ’emerging economies.’ The process there is hardly without its negatives, but give the choice between backbreaking subsistance agriculture with a world-horizon of a dozen kilometers and participating in emerging industry, the latter has been widely preferred. Labor and environmental standards need to follow those changes, and workers in emerging economies will likely have to fight for them as did those in Europe, North America and elsewhere. But they will have some leverage to do so, and the moreso as they emerge as a political constituency.

    Do these vectors imply a declining relative position for the US, its investors, and its citizens? Yes, yes, and yes: and for the rest of the world that is a good thing. We use too many resources, are disproportionately wealthy in part because of a situational advantage two generations ago, and are not necessarily good stewards for the world’s populations as a whole; regardless we weren’t chose by others to lead. We can live well if we accept the need to negotiate and that our richness is not the be all and end all of the world’s population. If we fight it, we’ll land all the harder, and deserve to. Life here will still be plenty fine when, if, and as we’re a mite less piggy and get back to using our brains for something more than media sponges.

    One world: Love it or leave it. O’ course we could mangage it a tad better as we now see.

  3. tz

    Is everyone else using some other language? I keep hearing the term “Free Trade” when it means 10,000 page agreements protecting kleptocrats on both sides of the borders, or paying for some subsidy (e.g. transportation) for one on one side or the other, or as a license to steal, as in China stealing our Intellectual Property, we stealing from them via broken contracts, pollution, etc., to get cheap baubles. All in a manipulated (i.e. “managed”) monetary system where the interest rates and prices are no more a natural outcome than in the old USSR.

    And this is called “free trade”?

    Voluntary trade across borders, be they county, state, or national give gain and makes friends of the traders.

    The proper meaning is no interference (with tariffs or subsidy) voluntary exchange under the rule of law so property rights and contracts are honored. Something like that ended in 1914, but we’ve not had anything like this in my lifetime.

    The only friends made by our current form are in the capitols, and the trade is cash for influence.

  4. Doug

    Thanks for posting Dani Rodrik’s important comments. Toward the bottom, he writes:

    Today, the question is no longer: “Are you for or against globalisation?” The question is: “What should the rules of globalisation be?”

    This is just one more example of the brutal costs of the ‘either/or-ism’ embedded in our culture by those who believe in ‘single answers’ to all of life’s many challenges. “For us or against us”; “patriotic or not”; “free markets or regulation”; “government is bad versus socialism/communism”; and on and on.

    Among other things, this ‘either/or-ism’ robs us of any chance to be effective problem-solvers. Instead of disaggregating problems into parts and solving them, we aggregate everything up to “either this or that” and, depending on which side one’s one, the ‘this’ is all good all the time and the ‘that’ is evil.

    Of course, one thing about ‘either/or-ism’ is that it’s a whole lot simpler — and another is that it supports careers and the pursuit of wealth and power.

  5. Anonymous

    tz, I agree. ‘Free Trade’ led to the comment by Chevez ‘We do not want free trade, we want fair trade.’

    Free trade agreements, as now constituted, are abhorent.


  6. Anonymous

    The argument for free-trade (Neo-liberalism) is like the argument for democracy. Pure democracy sounds like a good thing but even the founding fathers understood that we needed a bill of rights and three branches of power in the government to limit the power of the majority.
    In a Utopian world free-trade is the way to go. Unfortunately we do not live in such a world.
    When I started hearing politicians and economist speak about Americans being competitive with third world workers I knew exactly where we were going. That means that the government had taken as policy to lower the living standards of working Americans to the level of third world nations. That is the only meaning to be drawn. It should be obvious to all that there are limited resources in the world and the government has taken upon itself that Americans should have to compete with third world workers for those resources at the profit of multinational corporations.
    Many will ask, “Whats wrong with that?”, let me tell you. You are asking Americans to pay for their own destruction at the benefit of a few people with the wealth to live in a global society.
    I go to work. I make a wage.My wages are going to improve the lives of people in another nation and lessen my living standard. That is messed up. If you can’t see that….then you are a fool.
    Does that mean that I don’t want to improve the living standards of third world nations? No that is not what I am saying, but there had better be a way of doing it without turning the U.S. into a third world nation.

  7. Anonymous

    So is Dani Rodrik’s complaint that economists overstate the case for free trade, or is his complaint that free trade makes things worse for certain Americans? And if the latter, then why only focus on Americans? If free trade is improving the lives of unskilled workers in poor developing countries at the expense of unskilled workers in America, then isn’t that an egalitarian outcome, albeit a peculiar kind of egalitarian outcome?

  8. Anonymous

    “If free trade is improving the lives of unskilled workers in poor developing countries”

    Nonsense. Neo-liberalism has actually stunted growth for most developing economies.

    I suggest everyone read “Bad Samaritans” by Ha-Joon Chang


    The author pretty much demolishes the world is flat-free trade Orwellian doublespeak crapaganda.

    If you want a specific case read:

    And the Money Kept Rolling in (And Out): Wall Street, the Imf, And the Bankrupting of Argentina by Paul Blustein.

  9. david from seattle

    I agree with TZ. We only have to look back in history to understand that we have not had a true free trade economy in the US if that is what Dani Rodrick is going to use as the measuring stick.

    The fact of the matter is, how can we have free trade or better labeled earlier, ‘fair trade’ from Chevez (which I’d define as free trade where both the interests of business and consumers are protected by law) if we have a centralized monetary system?

    Our money is manipulated by central banks with no competing domestic currency to provide checks and balances. If your money is not solid but can vary in value from day to day you’re not in a fair trade system, because your currency can be unfairly manipulated.

    In addition, if we are looking at the U.S. economy, we need to understand the unfair legal and tax restrictions that domestic companies face here that don’t necessarily exist in the rest of the world. Think NAFTA and where jobs and profitability went. Think, China, where low cost labor (and lack of labor laws) further outsourced our economic infrastructure in manufacturing.

    Now when you put it all together, you realize that central banking and over regulation of an economy produces this Harvard theorists results. His research should more correctly be an illustration and an analysis of an unfair and fettered global trade system.

    A true fair/free trade system has not existed since 1914 as TZ said earlier. I don’t think the world globalised before 1914 and so therefore, this research and these metrics aren’t even based on a true free economy.

    Probably the closest snapshot of a free trade economy would be better measured in e-commerce. You only have to look at the rapid growth and profits from those who have less taxation and less limitation on their abilities to market and conduct business.

    However, even the virtual world has tinges of manipulation as the currency used is still largely from central banks.

  10. rexl

    i do not believe people have changed or ‘evolved’ very much and therefore the probable ‘compensation mechanism’ is and will be ‘WAR’.

  11. Fledermaus

    “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 . . . that will render globalisation more effective, fairer, and more sustainable.

    Their policy proposals are often vague (when specified at all), and command little consensus.”

    That’s the rub ain’t it. Whenever i saw one of the free traders casually mention how disappearing manufacturing jobs was no problem because there’d be a bunch of new better jobs created – hand waiving – somehow. But they could never say what these jobs were.

    Further it just doesn’t make logical sence that a company would ship 50 $40K/year jobs overseas where 100 people would work for $8k/year. Yeah that would save money and lead to lower prices. But there would not be 50 new $60k/year jobs. At most you might get a few shipping or logistics jobs, or lower paid retail jobs covering the new demand created by the lower price. But not enough to be a full replacement for the jobs lost.

  12. Michael McKinlay

    Not one mention of Peak Oil

    Everything about the debate relies on ignoring the elephant in the living room ~ Peak Oil … In a word, using 6 barrels of crude oil for every new barrel discovered is called ~ unsustainable.

    And … those new barrels are from smaller deposits, deeper in the ground, further under the ocean, in nationalized countries, in politically unstable countries and \ or all of the above.

    The low hanging fruit of crude oil production has been picked and no new production can replace the low cost nor can alternative fuels be scaled up to cover the shortfall even at higher costs.

    And just what do economists think will happen to trade if and when oil prices go quickly higher than today?

  13. Anonymous

    Even economists are beginning to understand the staggering, all-in, true cost of globalization to the US (and the world).

    We supply the consumer market, and they supply the gulag labor. Short run slash and burn capialism at it’s finest.

    The platform, asset lite, stateless corporations have their way, financed by wall street, marketed by academia, and implemented by the US government.

    Hold on to your financial seat belts.

  14. Benedict@Large

    Richard Kline said…
    economic globalisation … was likely to improve the wealth and life of many inhabitants in ’emerging economies.’

    This is a ridiculous assertion. While under optimal conditions, globalization can increase the wealth of an emerging economy, the distribution of that wealth among the inhabitants is a totally separate matter and highly dependent upon local political structures. It hardly matters to the individual peasant whether he is a subsistence farmer or a subsistence factory worker. In fact, it can be argued that the latter is worse as it decreases individual autonomy and increases dependence.

    We use too many resources, are disproportionately wealthy …

    A some level, this assumes a zero sum game, and it is a major assertion that globalization is anything but. Is this assertion then wrong? Then by extension … ?

    tz said…
    “Free Trade” … means 10,000 page agreements protecting kleptocrats on both sides of the borders

    This might otherwise be said: Free trade might be a nice idea, but we haven’t tried it yet. Other commenters seem to agree.

  15. Woody (Tokin' Lib'rul/Rogue Scholar & O'erall Helluvafella!)

    …which may well be the most serious threat the world has ever faced.

    nah, that was probably that comet that extinguished about 95% of ALL life…

    but it is the most serious threat that humanity has ever faced…

    This might otherwise be said: Free trade might be a nice idea, but we haven’t tried it yet.

    A shameless rip-off: Asked what he thought of Western civilization, Gandhi said it would be a good idea…

    Then, though it is probably apocryphal, there is the story of the three planets to consider. That is, in order to lift ever person in the world to the level of prosperity enjoyed by the poorest Americans would require the resources of three more planets endowed exactly as Earth is with exploitable materials. A quick glance heavenward ought to assure the free-traders of their folly, cuz if those planets were there, you know fer sher they’d be visible…

  16. Anonymous

    This article exhibits a confusion rendering its conclusion unclear. “Globalization” is expressed often without any clear demarcation of its meaning. At the heart of this indeterminacy is how “globalization” is distinguished from international trade. Indeed, often these seem indistinguishable in the article, which is why few if any are “opposed” to “globalization,” as the author concludes. International trade has been around for a long time. Globalization is an amorphous extension of this historic human enterprise, and in what way it differs the author leaves uncertain. So doing, the point of the article is lost.

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