Dani Rodrik down a dangerous path

April 5, 2007

I have finally come round to delving into the contribution made by Harvard Professor Dani Rodrik in the Financial Times recently, entitled “The cheerleaders’ threat to global trade”.

It shocked me when I first read it, but I needed to let emotions calm down and more time to go through it. In a letter to the FT, Gary Hufbauer from the Peterson Institute (probably walled for non-subscribers) wrote that Rodrik’s contribution was “unnecessary and regrettable”. I fully agree. And this is why:

Rodrik:

“Which is the greatest threat to globalisation: the protesters on the streets every time the International Monetary Fund or the World Trade Organisation meets, or globalisation’s cheerleaders, who push for continued market opening while denying that the troubles surrounding globalisation are rooted in the policies they advocate?”

Comment:

The momentum for big anti-WTO and anti-IMF meetings has waned. Even when the Singapore authorities in the annual meetings in 2006 ridiculed themselves by banning 20 or so NGOs to enter the territory last September, one can’t pretend there was an anti-globaliser-rush to Singapore. Of course, that meeting decided that countries like Brazil and Turkey would receive more voting rights. What is more, the IMF has also proved it can learn: got it wrong with the Asian crisis? Well, policies on exchange rates for example have drastically changed. As for the WTO – the fact that the Doha Round is led under the sign of “Development” is precisely its problem: it has lost its way, and will probably not be concluded.

Rodrik:

“A good case can be made that the latter camp presents the greater menace. Anti-globalisers are marginalised. But cheerleaders in Washington, London and the elite universities of north America and Europe shape the intellectual climate. If they get their way, they are more likely to put globalisation at risk than the protesters they condemn for ignorance of sound economics”.

Comment:

Not so sure. There are enough anti-capitalists or serious globalisation-critics to be found in academia, and often in the best universities. Dani Rodrik himself is such an example. See also Robert Wade at the London School of Economics, very much reputed a pro-globalisation, pro-business institution. Richard Freeman, Rodrik’s colleague at Harvard, largely contributed to the current debate about the effect of globalisation on worker’s wages, now taken on by, guess whom: the IMF!

Rodrik:

“That is because the greatest obstacle to sustaining a healthy, globalised economy is no longer insufficient openness. Markets are freer from government interference than they have ever been. Import restrictions such as tariff and non-tariff barriers are lower than ever. Capital flows in huge magnitudes. Despite barriers, legal and illegal immigration approaches levels not seen since the 19th century.”

Comment:

For sure: openness alone does not solve a country’s economic problems. It’s mainly government and institutional conditions that do.

“The greatest obstacle to sustaining a healthy, globalised economy” is unfair, asymmetric and untransparent rules. The WTO is the only multilateral institution able to provide or protect these, but it is undermined by the current rush to bilateral trade deals motivated by power-politics (see Martin Wolf on the US-Korea FTA).

I am not sure that “markets are freer from government interference than they have ever been”. On the contrary, the huge state-capacity developed after WWII in the OECD world is something new in history. In the 19th Century governments didn’t interfere much in the economy, compared to today. Government expenditure to GDP ratios at around 40% (sometimes even 50%) of GDP in the richer OECD countries today attest this. Furthermore, standards, regulation, legislation have reached levels that human history has never seen before. Yes, since the 1980s governments have increasingly withdrawn from proper production functions, mainly by privatizing previously state-owned industries and service providers. However, this is governmental self-restraint, compensated by more regulation.

Rodrik:

“Consequently, no country’s growth prospects are significantly constrained by a lack of openness in the international economy. Even if the Doha trade round fails, poor countries will have enough access to rich country markets to achieve what countries such as China, Vietnam and India have been able to do. “

Comment:

I am not so sure of that . For may countries dependent on exports of agricultural commodities, market access to rich countries is rendered difficult by high tariffs, NTBs and distortive subsidies. Tariffs in textiles – which interest China, Vietnam and the others – still remain high. Antidumping actions target precisely the areas in which developing countries can compete. In addition, tariff escalation makes it difficult for poor countries to climb the value-added ladder and enter into more lucrative areas of industrialised food processing, for example. Furthermore, it is increasingly recognized that least-developed-countries would gain more if middle-of-the road economies such as India or Brazil reduced their own tariffs and stopped going down the antidumping path. But here India in the Doha Round resists, even though Brazil has made gestures towards LDCs. Market access for poor countries is still not to be taken for granted.

Rodrik:

“Closed markets may have been a fundamental problem during the 1950s and 1960s; it is hard to believe they still are.”

Comment:

Indeed average tariffs on manufactured goods have gone down significantly since the GATT. The EU practices an average of 5%. But now countries which have climbed the value-added ladder need to do more – e.g., India, again. Furthermore, we have entered an area in which services markets – not very much liberalised and internationally open – need more attention. They are indeed more controversial because indeed they reach into government regulation. This doesn’t mean that keeping these markets closed is a sound economic proposition.

Rodrik:

“The greatest risk to globalisation is elsewhere. It lies in the prospect that national governments’ room for manoeuvre will shrink to such levels that they will be unable to deliver the policies that their electorates want and need in order to buy into the global economy”

Comment:

China: it has chosen to use the WTO as a tool to implement policies that support its current economic take-off. Where is there a policy space problem? If China wants, it can stop respecting stringent WTO rules, hard to see who could really stop it from doing so. Not even the US. OK, small countries such as, say, Honduras, would lose more if they didn’t abide by WTO rules. But a country like Honduras generally benefits from special treatment and longer implementation deadlines anyway. Where its policy space is really constrained, is in the bilateral deal with the US (DR-CAFTA) rather than the WTO, where it has more relative bargaining power and leverage than when facing its giant neighbour. Has GATT and WTO membership ever stopped India from going its own way in terms of economic policies?

IMF conditionality in the 1990s: yes, many policy errors, such as in the Asian crisis. But failures were very often due to partial or non-implementation of policy “prescriptions”. I’ve recently had a closer look at the case of Turkey, in the 1990s: Turkey is the IMF’s biggest client, which helped out each time a new crisis in the country’s boom-and-bust cycle emerged. One interesting fact I found is that Turkey almost systematically disrespected the IMF’s “condition” of fiscal discipline, especially each time elections loomed. This helped trigger the next financial crisis. If there is one instance in which Turkey significantly agreed to give in on its policy space is the EU accession process. Fiscal discipline, privatization, liberalization have been happening much more systematically since the EU accession process started (from 1999 onwards when Turkey’s candidacy was accepted, accelerated in 2002 when political stability set in, continued since 2004, when accession negotiations were launched) than under IMF “rule”.

“Globalisation’s soft underbelly is the imbalance between the national scope of governments and the global nature of markets. A healthy economic system necessitates a delicate compromise between these two. Go too much in one direction and you have protectionism and autarky. Go too much in the other and you have an unstable world economy with little social and political support from those it is supposed to help”.

Except maybe for financial markets, and even there, the truly global nature of markets can be debated. The world’s economic trade giant, the EU, trades first and foremost with itself (70%+ of EU countries’ trade is with other EU countries). Regarding the “delicate compromise” – yes there is constant interaction between government policies and international markets. The current “liberal” order was decided by governments. Anything governments do can be reversed. Governments have decided to liberalise the capital markets since the 1980s, which contributed to creating a global financial industry. But governments have not decided to liberalise labour markets – see the wall separating Mexico and the US and the dead Africans on Europe’s Mediterranean shores. Yet indeed: each measure intended to open a particular sector to international competition requires some adjustments – sometimes costly. The speed of adjustment, or the compensation deals a government negotiates with workers that are being laid off are up to each local decisions. Nobody imposes any restrictions on this.

Rodrik:

“If there is one lesson from the collapse of the 19th century version of globalisation, it is that we cannot leave national governments powerless to respond to their citizens. The genius of the Bretton Woods system, which lasted for about three decades after the second world war, was that it achieved such a compromise. Some of the most egregious restrictions on trade flows were removed, while allowing governments freedom to run independent macroeconomic policies and erect their own versions of the welfare state. Developing countries were free to pursue their own growth strategies with limited external restraint. The world economy prospered like never before.”

Comment:

If there is one lesson from the collapse of the 19th century version of globalisation, it is that nationalistic sabre-rattling behind ever higher trade barriers within the context of imperialistic land-grabbing is more damaging than international markets.

Yes, the Bretton Woods system was one of so-called “embedded liberalism”. But in 1944 when the Bretton Woods agreements were signed, the world economy was much poorer than today, much less sophisticated than today, and the “world economy” that mattered only composed of Europe and the US. It relied on the US’s economic might and its willingness to maintain the dollar “pegged” to gold. These times are over since at least 1971. We know that fixed exchange rate systems are risky today (that’s why most currencies float, nowadays), and unless you put an end to the free flow of capital – which you can do, but this means the end of prosperity – you can’t go back to Bretton Woods. This doesn’t mean everything is rosy today, but new solutions more adapted to today’s economy should be found to guarantee financial stability. Post-1945, developing economies prospered mainly because commodity prices were high, sustained by rich-countries’ post-war reconstruction. Today, Hugo Chavez and Vladimir Putin enrich their populations thanks to high oil prices sustained by China’s and India’s growth, “defying all gravity”, when it comes to mainstream economic policies (and while having a joy-ride provoking the USA). The day the oil factor falls, you can expect a new crisis, and many questions by their populations on why they didn’t create the proper infrastructure for a more sustainable economic growth path in the future.

Rodrik:

But what about China and India, which have taken off in the pastquarter-century? Are they not proof that poor nations need the current variant of globalisation instead of the Bretton Woods variant? Actually, no. What is striking about China, India and a few other Asian countries that have done well recently is that they have played the globalisation game by the Bretton Woods rulebook. These countries did not significantly liberalise their import regimes until well after their economies had taken off; they continue to restrict short-term capital inflows. They have used industrial policies – many banned by the WTO – to restructure their economies and enable them to better take advantage of world markets.”

Comment:

India and China. China liberalised its import regime incrementally since the early 1980s, prudently, special economic zone by special economic zone. The pay-off has been huge. China has very much abided by “WTO inspired rules” in its 14-year negotiation process to access the WTO in 2001. This process has further spurred its growth, which, since WTO accession, said to be under the most tight conditions any country has had so far, has continued booming. India: why has India’s economy only really taken off since its capital account and subsequent economic liberalisation in 1991 and not before?

Rodrik:

“Rich and poor nations need breathing space for different reasons. Rich countries need it so they can revive the social compacts that underpinned the success of Bretton Woods. They need flexibility to interfere in trade when trade conflicts with deeply held values at home – as, for example, with child labour or health and safety concerns – or severely weakens the bargaining power of workers. Poor nations need room to engage in exchange rate and industrial policies that will diversify and restructure their economies, without which their ability to benefit from globalisation is circumscribed.”

Comment:

The “social compacts” that existed under Bretton Woods are different: more complex and differentiated societies, service-oriented economies, etc. The times of Bretton Woods are dead. The GATT has Articles XIX and XX which provide for safeguard measures than can allow any country to restrict any trade for almost any valid reason: the only restriction is that the measures must not discriminate against one particular country or made in such a way as to give obvious privileges to national producers. Infant-industry protection and industrial policies are highly contentious and hotly debated. But trade protection is a second-or third-best option to support the take-off of particular industries – investments in higher education, infrastructure, the legal environment to start off and run businesses, or better tax policies, might probably pay off better than tariffs protecting some industrial plant that will never know how things can be done better because it is cut off from the rest of the world, due to protection.

Rodrik:

“It is time, then, to consider a new bargain. When rich and poor nations come together to negotiate the rules of the game they should stop thinking in terms of exchanging market access: “I will open my markets in x if you open yours in y.” They should consider ins-tead exchanging policy space: “I will al- low you to protect your national social compact if you allow me to engage in development strategies that conflict with WTO and International Monetary Fund rules of good behaviour.” The challenge is to design procedures that enable the use of policy space for so-cially desirable purposes while limiting it for beggar-thy-neighbour purposes.

Comment:

A new bargain? Happy to discuss. I don’t know if new-age mercantilism, which is what Dani Rodrik is proposing, is the right solution, though. Trading the reduction of a 10% duty on a particular product against a reduction of 15% in another area is economically unsound, although it has proven to be the best way of of furthering trade liberalisation within the context of the GATT and WTO. Transferring this method to regulatory and other “soft” areas where countries only hurt themselves more in refusing to open a particular market than gaining through access to a neighbour’s telecommunications market is … economically and politically very unwise. The agreement on services in the WTO (GATS) is one of the weakest WTO agreements insofar as it relies on countries’ voluntary writing down of sectors/subsectors in which they open their markets, and under what conditions. The agreement is so weak that it is compensated by stronger commitments imposed by the US or the EU on less powerful trading partners in bilateral negotiations – those partners in effect, loose much more policy space in such a bargaining situation than in a multilateral WTO setting. So don’t blame loss of policy space on on the WTO, but on the big trading powers.

Rodrik:

“Risky? Yes. There is always the chance that such an approach would slide into protectionism, pure and simple. But the alternative is, if anything, more risky. Historians teach us that globalisation rests on delicate social and political pillars. The first order of business today is to strengthen these pillars, rather than to push market opening further.”

Comment:

Risky? You said it Mr Rodrik. It’s even dangerous. That within countries timings and transitions to new conditions imposed by more open markets need to be negotiated is fully acceptable and generally accepted by most economists, endangering the long-term prosperity of a domestic population is even more risky for the international system and international peace than the right approach to making a minority of loosers adapt to a situation in which, overall, everybody wins.

Advertisements

One Response to “Dani Rodrik down a dangerous path”

  1. Jean Dubois Says:

    Very good analysis of the shortcomings in Rodrik’s article. I think he should interview producers in developing countries before saying that openness is effective. It might be true for manufacturing goods but not for agriculture or services. It’s time for Rodrik to discover that the world economy is mainly in services and that the fragmentation of world production requires investment liberalisation as well. The reason why hundreds of regional trade agreements are negotiated is that there is a real need for removing barriers on trade in services and investment. Closed markets are still a problem because we are no longer in the 19th century or in the 1950s/1960s.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: