Saving Globalization from its
Cheerleaders
National Trust Forum on Democracy,
Globalization and Societal Welfare
October 2007
Dani Rodrik
Three apparently different problems
created by globalization



Chinese exports of toys containing lead
paint
The spread of the sub-prime mortgage
lending crisis from the U.S. to the rest of
the world
The use of child labor in internationallytraded products
…which are less different than it seems

In all three cases, a country is exporting
a good, service, or asset that is
problematic for the importing country




Chinese exports of lead-tainted goods
U.S. exports of mis-priced mortgage-based
assets
Developing country exports of child-labor
services
International rules (and our prevailing
conception of globalization) do not
provide clear-cut solutions
Consider the similarities



In all of the cases, selling goods that are “sub-standard” is
cheaper and provides a competitive advantage.
In all of the cases, we deal with exporting countries
that have, on paper, strong domestic regulations and
standards
 Chinese lead standards are more stringent than those
in the U.S.
 In the labor standards arena, most countries have
ratified more ILO conventions than the U.S. has.
 Credit rating agencies in the U.S. are presumably the
best in the world.
Enforcement of these domestic regulations and standards
turns out to be weak and problematic.
Consider the similarities



The relevant attribute of the exported good is not directly
observable to the consumers in the importing country
 A consumer cannot tell whether the toy contains lead
paint or has been manufactured using child labor under
exploitative conditions; nor can a lender really tell the
risk characteristics of the bundled assets it holds.
Consumers in the importing countries have preferences
over this "hidden" attribute.
 We are less likely to buy the good, ceteris paribus, if it
contains lead paint or has been made by children, or is
likely to cause financial havoc.
Consumers' preferences are heterogeneous. That is, each
one of us is likely to have a different evaluation of the
tradeoff between the "hidden" attribute and other aspects
of the good, such as its price. (Put differently, the price
discount at which we are likely to prefer buying the leaded
or child-manufactured good differs across consumers.)
Possible solutions (0)

Do nothing



This is the current approach
Deal with problems on a case-by-case
basis
At the cost of


inefficient outcomes
erosion of public support for and
legitimacy of globalization
Possible solutions (1)

Market-based approach: labeling



Currently preferred approach for “fair” labor
standards: “fair trade”
In principle, that is what credit-rating agencies
did
 The information conveyed was not nearly as
meaningful as it appeared
 Possibly similar problems with fair trade?
Plus, we routinely and instinctively reject it in
other areas
 e.g., food and child safety
Possible solutions (2)

International rules



Requires harmonization of policies and
practices
Combined with international “policing” and
monitoring
Hard to imagine that it is practical
 Norms and values are divergent
 Few countries are likely to accept the
constraints on national sovereignty that this
would require

Example of US versus Europe following sub-prime
mortgage crisis
Possible solutions (3)


New “traffic rules” to manage the interface between
national regulatory settings and social orders
Creation of policy space



E.g. expanded role for domestic “safeguards”
That would allow restrictions on trade in good, service, or
asset when multilaterally accepted procedural requirements
are met
Problem: international rules currently overlook the need
for such “policy space,” and often prohibit the exercise of
safeguards

Example of Japanese imports of spinach from China



Chinese export licensing is WTO-legal; Japanese import-licensing may not
have been
It is WTO-illegal to restrict imports because of labor
standards that violate importing country norms
Re-create something akin to the “Bretton Woods
compromise,” or “embedded liberalism.”
Zooming out:
The political trilemma of the world economy
Deep economic
integration
Golden
Straitjacket
Global
Federalism
Democratic politics
Nation state
Bretton Woods compromise
Pick two, any two
The new conventional wisdom

Globalization does contribute to rising inequality,
stagnant median wages, and rising sense of insecurity
in rich countries (e.g., Blinder, Krugman, Summers)


Trade and financial openness are unlikely to lead to
economic growth on their own, in the absence of a
wide range of complementary institutional reforms
(e.g., World Bank, Rogoff)


cf. “trade and wages” debate 20 years ago
cf. trade and growth literature 10-15 years ago
Therefore, globalization requires stronger safety nets in
the North and stronger institutions in the South.
Current strategy of globalization

Continue to lower economic barriers at the border



Doha Round
Cautious capital-account opening
While strengthening institutions

In the rich countries


In the poor countries


Social safety nets
Enhanced “governance,” deregulation of product and
labor markets, improved financial market regulation
and supervision
Maintained hypothesis: the greatest bang for the buck lies
in pushing for increased openness and market access


But is this view correct?
What if the binding constraint on maintaining a healthy global
economy lies elsewhere?
Do existing barriers to international economic integration
constrain growth? (A)
A parable of two countries

Country A
…
…
…
…
…
has preferential, free access to the US market for its exports
can send several millions of its citizens to the US as workers
receives huge volumes of direct investment
is totally plugged in to US production chains
for which the US Treasury stands ready to as lender of last
resort
… has effective security guarantee from the US military

Does globalization get better than this?
Whereas B is a country for which
… the US maintains a trade embargo, and does not have
diplomatic relations
… which receives neither aid nor any other kind of assistance
… and which is kept outside international organizations like the
WTO
… which is prevented from borrowing from the IMF and WB.

Which country did better?
A digression: Explaining the puzzle

Without institutional harmonization, economic integration is
condemned to remain shallow

Despite disappearance of formal border barriers, border effects
remain strong



EU versus NAFTA models

One is hard because it entails legal, institutional, political integration









Trade: the role of regulatory & jurisdictional discontinuities (borders are
estimated to raise costs by around 40%)
Capital flows: problems of sovereign risk, moral hazard, and absence of
ILLR
Acquis communautaire (>90,000 pages)
European Court of Justice
Significant inter-regional transfers
Labor mobility
Growing pains of a quasi-federal political system
The other is comparatively easy
But only the first model can generate convergence in living standards
EU model not in the cards for the vast majority of developing
countries
Second-best world requires second-best policies

The challenge of generating domestic capabilities in a world with
national borders
Do existing barriers to international economic
integration constrain growth? (B)
The role of international trade
Impacts on real income from full liberalization of global merchandise trade,
2015
Developing countries liberalize
Agriculture and food
Textile and clothing
Other merchandise
All sectors
High-income countries liberalize
Agriculture and food
Textile and clothing
Other merchandise
All sectors
All countries liberalize
Agriculture and food
Textile and clothing
Other merchandise
All sectors
in 2001 dollars (billions)
High
Developing income World
26
14
40
9
14
24
6
52
58
45
79
124
as percent of base income in
2015
High
Developing income
World
0.34%
0.04%
0.10%
0.12%
0.04%
0.06%
0.08%
0.16%
0.15%
0.58%
0.25%
0.31%
26
15
4
44
98
1
5
106
124
16
9
150
0.34%
0.19%
0.05%
0.57%
0.31%
0.00%
0.02%
0.33%
0.31%
0.04%
0.02%
0.38%
55
22
10
87
118
16
57
192
173
39
67
278
0.71%
0.29%
0.13%
1.13%
0.37%
0.05%
0.18%
0.60%
0.44%
0.10%
0.17%
0.70%
Source: Anderson, Martin, and van der Mensbrugghe (2006)
Do existing barriers to international economic
integration constrain growth? (C)
The role of international capital flows
Source: Prasad, Rajan, and Subramanian (2006)
Countries with less access to foreign savings have grown more, not less!
Some intermediate conclusions

The gains from further liberalization of goods and capital
markets are small



But the losses from a real retreat from today’s globalization
would be huge
Therefore, we should place a high premium on policies that
make such a retreat less likely


As long as the world remains politically fragmented and
transaction costs emanating from jurisdictional discontinuities
block “deep” economic integration
even if they run contrary (in the short run at least) to the marketopening agenda
The requisite policies will typically expand 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
Where globalization’s constraints bite:
rich country examples

Labor standards


Environmental, health and safety standards


If European citizenry want to apply a higher precautionary standard
than other countries, should trade rules prevent them?
Regulatory “takings”


Domestic labor laws protect workers from displacement through the
hiring of child labor; should trade be allowed to contravene this norm?
Should foreign firms in the U.S. receive greater protection from policy
changes than domestic firms (as NAFTA and BITs may require)?
Currency “manipulation”

Does it make sense that WTO rules permit countervailing for export
duties, but not for undervalued currencies?
Where globalization’s constraints bite:
rich country examples

Redistributive provision of social insurance


If taxation of capital and skilled professionals has historically helped
fund social insurance programs, should their mobility be allowed to
undercut this “social compact”?
Trade versus technological change

Domestically, R&D and technological progress are highly regulated (cf.
stem cell research); should trade, which is analogous to technological
change, be left unregulated as a rule?
These are all difficult questions, without clear-cut answers. They will likely
increase in salience with services off-shoring. The appropriate locus for
their discussion and resolution is most likely at the national level, given
the wide variety of standards and norms that prevail.
Where globalization’s constraints bite:
rich country examples

Is there evidence that more than narrow
self-interest is at work in rich countries?



Greater concern about foreign labor practices
in skill-rich congressional districts (Krueger
1996)
Anti-trade attitudes determined only in part by
labor-market impacts; values and norms seem
to matter too (Mayda and Rodrik 2005)
 Women and individuals with high levels of
“neighborhood attachment” are more
protectionist
Positive willingness to pay by rich-country
consumers for improved labor standards in
poor nations (Hiscox and Smyth, 2006)
Where globalization’s constraints bite:
poor countries

Evidence and theory suggest that growth strategies
require policy space


Different fixes for different countries





From the Washington Consensus to a diagnostic
approach
“Binding constraints” differ
Different constraints throw different diagnostic signals
For example, investment constrained economies
respond differently to capital inflows than saving
constrained economies
Task: match policy priorities with diagnostics
Desirable policy reforms can be heterodox


Dual-track pricing, TVEs, SEZs in China provided
effective price incentives, security of “property rights,
and outward orientation, but not in the standard way
Successful heterodoxy is a reflection of the need to
overcome second-best complications
Where globalization’s constraints bite:
poor countries

Trade regime


International capital markets


Agreements on subsidies, TRIMs, TRIPs, and other
negotiations on services  narrowing room for
“industrial policies”
Financial codes and standards  no roles for
development banking and credit market interventions
Monetary rules

CB independence and “free floating”  no role for
exchange rate as developmental policy instrument
Where globalization’s constraints bite:
lessons of history
Three interpretations of collapse of earlier wave of
globalization, 1815-1913 (James 2001):
1.
Inherent instabilities in global finance
2.
Social and political backlash
3.
Overloading of institutions that manage
globalization
What is common in each of these explanations is the
imbalance between the global nature of markets
and the national nature of institutions of
governance.
Where globalization’s constraints bite:
lessons of history
“The ensuing backlash [against globalization] had some
predictable properties. Supporters of the classical order had
argued that giving priority to international economic ties
required downplaying such concerns as social reform, nation
building, and national assertion. In the new environment,
some of those newly empowered responded that if the choice
was between social reform and international economic
integration, they would choose social reform – thus leading to
the Communists’ option of radical autarky. If the choice was
between national assertion and global economic integration,
another set of mass movements chose nation-building – thus
leading to fascist autarky in Europe and economic nationalism
in the developing world.”
Jeffry Frieden (2006)
Can policy space be enhanced without endangering
globalization?
An illustration
Generalizing the WTO safeguards/escape-clause approach:



Allows countries to re-impose tariffs under certain circumstances
Principle behind safeguards: negotiated opt-outs, with procedural
constraints, better than disorganized opt-outs
Restricted at present to very limited circumstances


An import surge, causally linked to “injury” to domestic industry; must
be applied on MFN basis; must be temporary; requires compensation
Can be broadened to wider set of circumstances in which the
legitimacy of trade is at issue

Subject to institutional and procedural prerequisites


A “development box” for developing countries



Which, in particular, provide standing to beneficiaries of trade
Variable geometry instead of single undertaking
Exchange of policy space instead of market access
Risk of slippery slope

Limited if experience with AD is a guide