Dani Rodrik
March 2011
• Great demand for beaver in 17th century,
considered at the time the most valuable fur
• King Charles I prohibited the use of any other material
besides beaver fur in making hats
• Fur traditionally supplied by Russia, through
the Baltic and Black Sea
• But depletion of beaver stock due to overhunting
• the discovery of America and With
large supply of beavers in the North,
an alternative source of beaver fur is
established
• Fur trade dominated by the French
monopoly and the land route in “New
France”
• Fur brought to French towns by Indians
themselves
• Two frustrated traders/adventurers,
shut out by the French, look for
alternative route, through Hudson’s Bay
to reach Indians directly
• They travel to London and convince
Prince Rupert, the cousin of King
Charles II, to take an interest and
sponsor a ship to sail through Hudson’s
straits and establish a fort on the shore
of Hudson’s Bay (named Fort Rupert)
Radisson and des Groseilliers
• The Nonsuch sails from London on the
morning of June 3rd, 1668, with des
Groseilliers on board
• It spends the winter on Hudson’s Bay,
where des Groseilliers makes contact
with the natives and makes his first
purchases
• Upon its return, the King grants a
charter and monopoly rights to “The
Company of Adventurers of England
tradeing into Hudsons Bay” which is
established on May 6, 1670
• The company is given property rights
over the entire land whose rivers drain
into Hudson’s Bay, which came to be
named Rupert’s Land
Prince Rupert
Whereas Our Deare and entirely Beloved cousin Prince Rupert [and others] … have at
theire owne great cost and charge undertaken an Expedicion for Hudsons Bay in the
North west part of America for the discovery of a new Passage into the South Sea
and for the finding some Trade for Furrs Mineralls and other considerable
Commodityes and by such theire undertaking have already made such discoveryes …
whereof there may probably arise very great advantage to us and our Kingdome …
Doe give grant and confirme … the sole Trade and Commerce of all those Seas
Streightes Bayes Rivers Lakes Creekes and Soundes in whatsoever Latitude they shall
bee that lie within the entrance of the Streightes commonly called Hudsons Streightes
together with all the Landes and Terriroryes upon the Countryes Coastes and confynes
of the Seas Bayes Lakes Rivers Creekes and Soundes aforesaid that are not already
actually possessed by or granted to any of our Subjectes or possessed by the
Subjectes of any other Christian Prince or State
And further We doe .. create and constitute the said .. Company for the tyme being and
theire successors the true and absolute Lordes and Proprietors of the same Territory
lymittes and places aforesaid
• The charter granted a monopoly over trade
• It also gave ownership of vast tracts of land (40% of
today’s Canada) directly to the company
• It gave the right to make laws and administer justice in
the territories over anyone living there (not just the
Europeans but the Natives as well!), to wage war and
military campaigns (against non-Christians)
• The company eventually became a state in all but
name, even issuing its own coins, which were accepted
as a medium of exchange over its territories
• des Groseilliers and company undertook investments and
enforced rules (relating to knowledge, security and contract
enforcement) that made long-distance trade possible:
•
•
•
•
•
Establishing the possibility and safety of the naval route to Hudson’s Bay
Undertaking exploration inland
Building forts and trading posts
Establishing relationships with the Indians
Providing knowledge about the types of goods Indians were interested in
buying in exchange (“market research”)
• Pacifying and making treaties with the Indians
• In return the Company was provided monopoly rights by the
sovereign
• To compensate for those costs, as well as provide for handy profits
eventually
• Markets need an infrastructure of rules and
governance
• Markets not self-creating, self-regulating, self-stabilizing
• Long-distance trade particularly prone to weaknesses of
“governance”
• Need “institutions” to make the rules and enforce them
• Those institutions can take different forms
• chartered trading monopolies one mechanism, but not the
only possible one
• Free trade and Gold Standard maintained in part by a “belief
system”
• But also by imperialism, in overt or disguised form
• Gunboats to enforce debt contracts
• Free trade treaties with Ottoman, Chinese, Japanese
• “Anglobalization”
• “no organization in history has done more to promote the free movement
of goods, capital and labour than the British Empire in the nineteenth and
early twentieth centuries.” (Niall Ferguson)
• The mercantilist and “liberal” models of globalization both
required:
• Subjugation to foreign powers
• Subjugation of domestic economic considerations to the requirements of
international markets
• The lesson of the interwar period internalized
• The clash between domestic politics and globalization’s rules
• collapse of Gold Standard in 1931
• Need to create space for domestic policy requirements
• A limited globalization, that prioritized domestic needs
• Room for Keynesian policies, welfare states, activist industrial
restructuring policies
• capital controls; fixed, but adjustable ERs
• GATT regime full of exceptions
• WTO + Financial globalization
• Maintained assumptions:
• There would be strong enough global rules,
• And if not, we could wait for the rules to catch up with
markets
• Rules would carry legitimacy even if they constrained
democratic choices
• Results:
• Legitimacy deficit
• Financial crises
• Uneven development record
• greatest successes (e.g. China) are those that play by BW rules
Option 1
Hyperglobalization
Golden
Straitjacket
National
sovereignty
minimize transaction costs, never mind
legitimacy and adverse cross-border spillovers
Option 1
Hyperglobalization
Golden
Straitjacket
National
sovereignty
Democratic
politics
Problem: not clear if compatible with democracy
(Friedman’s Coke and Pepsi)
Examples: Great Britain 1931, Argentina 2000-01;
Greece 2010?
Option 2
Hyperglobalization
Democratic
politics
National
sovereignty
Bretton Woods compromise
maximize democratic legitimacy at home and
minimize adverse spillovers, even if it comes at
the price of transaction costs at the border
Option 2
Hyperglobalization
Democratic
politics
National
sovereignty
Bretton Woods compromise
Problem: globalization must remain incomplete
Remember Bretton Woods
Option 3
Hyperglobalization
Global
governance
National
sovereignty
Democratic
politics
minimize transaction costs, but try to build
legitimacy and constrain spillovers through
global rules
Option 3
Hyperglobalization
Global
governance
National
sovereignty
Democratic
politics
Problem: requires significant restraint on
national self-determination and therefore
regulatory, institutional, and policy diversity
The political trilemma of the world
economy
Hyperglobalization
Golden
Straitjacket
Global
governance
Democratic
politics
National
sovereignty
Bretton Woods compromise
Pick two, any two
Which option do you choose?
• Chinese exports of toys containing lead paint (health and safety standards)
• Bretton Woods compromise
• The spread of the sub-prime mortgage lending crisis from the U.S. to the rest
of the world through CDOs (financial crisis)
• Global governance
• Imports of good made with child labor (labor standards)
• Golden straitjacket
• 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
• (Misleading) analogy with climate change
• where in the absence of global coordination, we get the “tragedy of the
commons”
• But an open economy is in every country’s own interest
• The terms of trade exception
• The mercantilist exception
• When nation states have room to follow the policies that suit
their circumstances best, the outcome is a healthy world
economy, not slippery slope to protectionism
• Need to economize on global cooperation in a G-0 world
1.
The good: managed globalization
•
2.
Better balance between the prerogative of nation states and
international rules
The bad: business as usual
•
3.
Continued reliance on (necessarily inadequate) improvements in
global governance and coordination
The ugly: return to the 1930s
•
Protectionist free-for-all