Dani Rodrik. The Globalization Paradox. Democracy and the Future of the World Economy. W.W.
Norton & Company, 2011. 288 pages. $26.95. ISBN: 9780393071610.
1. Rosa M. Lastra*
1. ↵* Professor of International Financial and Monetary Law, Centre for Commercial Law
Studies, Queen Mary University of London. Email: r.lastra@qmul.ac.uk
This is a timely book on an important subject for the future of the world economy. It fills a niche in
the market: a text that is readable by the general public, but that can also be appreciated by scholars
and experts in the field. The book represents a significant contribution to the literature on
globalization, drawing on historical, political, philosophical, and economic considerations. The
author, Dani Rodrik—Professor of International Political Economy at the Kennedy School of
Government at Harvard University—is one of the outstanding economists of our generation, and
certainly one of the more original thinkers. I had the good fortune of getting to know him during my
time in Columbia University; he combines common sense with intellectual rigor and credibility.
The book, which draws on earlier works by the author, is divided into twelve chapters, following an
introduction aptly entitled: “Recasting Globalization’s Narrative.” Chapter 1 provides a historical
assessment of the interaction between states and markets. The “globalization’s conundrum” is
summarized in the following words: [G]lobal markets are doubly problematic: they lack the
institutional underpinnings of national markets and they fall between existing institutional
boundaries. This dual curse leaves economic globalization fragile and full of transactions cots. . . . It
renders the quest for perfect globalization a fool’s errand (pp. 22–23).
Chapter 2, entitled “The Rise and Fall of the First Great Globalization,” discusses first the ascendancy
of free trade beliefs during the nineteenth century thanks to the efforts of economists such as David
Ricardo and John Stuart Mill, and then considers the gold standard and its eventual demise, finishing
the chapter with a brief exposé of the calamitous protectionism in the interwar period. Chapter 3
makes a qualified case for free trade in the context of its implications for distributive justice and
social norms. Chapter 4 discusses the Bretton Woods regime (“compromise”) and institutional
framework and the move from the transitional General Agreement on Tariffs and Trade (GATT)
(following the failed International Trade Organization) to the permanent World Trade Organization
(WTO). Drawing on Robert Lawrence, Rodrik makes a distinction between “shallow” and “deep”
integration:
Under shallow integration, as in Bretton Woods, the trade regime requires relatively little of
domestic policy. Under deep integration, by contrast, the distinction between domestic policy and
trade policy disappears. . . . Global rules in effect become the domestic rules (p. 83).
He concludes that: [t]he reality is that we lack the domestic and global strategies to manage
globalization’s disruptions. As a result, we run the risk that the social costs will outweigh the narrow
economic gains and spark an even worse globalization backlash (p. 88). Chapter 5 discusses what he
calls “Financial Globalization Follies,” commencing with the demise of the Bretton Woods consensus
on capital controls and fixed exchange rates, and concludes that “financial globalization has failed
us” and that countries that have opened themselves to international capital markets have faced
great risks and crises.
Chapter 6, entitled “The Foxes and Hedgehogs of Finance,” divides economists into two groups,
foxes and hedgehogs. Rodrik draws on the ancient saying attributed to the Greek poet Archilochus
that “the fox knows many things, but the hedgehog knows one big thing” and compares “the
hedgehogs who think freeing up markets is always the right solution (the ‘big idea’) and the foxes
who believe the devil is in the details” (p. 114). He considers himself amongst the “foxes,” regarding
Joe Stiglitz as “the most consummate fox among today’s economists” (p. 121), and recommends
skepticism towards the hedgehog type of economists who sport one big idea (be it “efficient market
hypothesis” or “rational expectations”). He is rightly concerned about “the huge chasm that has
developed between the reach of financial markets and the scope of their governance” (p. 129) but
firmly rejects the case for global financial regulation: “The very idea that we could erect a perfect
system of global regulation for international financial flows is itself a fairy tale” (p. 129). Chapter 7,
under the title of “Poor Countries in a Rich World,” considers different country experiences,
contrasting the resulting poverty in many countries in Africa with the success stories of east Asia, in
particular China. Rodrik considers that “[p]olitics is only part of the answer” (p. 158), and goes on to
explain in Chapter 8 the economic narrative to understand these divergences. He criticizes “trade
fundamentalists” and advocates a new development strategy (a “post-Washington consensus”
consensus) recalibrating the balance between states and markets.
Chapter 9, entitled the “Political Trilemma of the World Economy,” is a key chapter in the book.
Rodrik argues that we cannot have “deep economic integration” (he uses the term “hyperglobalization”), national sovereignty (nation state), and democratic politics all at once (pp. 200–201).
We can have at most two out of three. Since democracy cannot be compromised, and he rejects the
“global governance” option, he proposes a return to national sovereignty. He considers that:global
standards and regulations are not just impractical; they are undesirable. The democratic legitimacy
constraint ensures that global governance will result in the lowest common denominator, a regime
of weak and ineffectual rules (p. 204). His solution to strengthen the nation state is a critique of
hyper-globalization. He considers that this hyper-globalization agenda “gives predominance to the
needs of multinational enterprises, big banks and investment houses over other social and economic
objectives” (p. 206). Chapter 10 further elaborates his case against “global governance.”
Chapter 11 proposes seven principles for a new model of globalization, after considering how
intertwined the concepts of globalization and capitalism have become. The first principle, and this is
something that, as a legal scholar, I fundamentally agree with, contends that markets need other
institutions to support them, notably courts of justice, legal arrangements to enforce property rights,
and regulations to rein in abuse and fix market failures, since “markets do not create, regulate,
stabilize or sustain themselves.” Interestingly, he points out that “what is true of domestic markets is
true also of global ones.” The logical extension of his argument (which would contradict a basic tenet
of the book, Rodrik’s choice to solve the “trilemma”) is that if national markets need adequate
national rules, international markets need adequate international rules! This would mean that
national sovereignty, rather than global governance, should be sacrificed in order to solve the
“trilemma” (We can—indeed—globalize democracy at the cost of national sovereignty—p. 200). The
other six principles deal with a number of issues including democracy and legitimacy in the context
of nation states, different ways of achieving prosperity and the role of non-democratic countries.
Not all the principles are equally relevant and there are some inter-linkages.
The final chapter of the book, entitled “A Sane Globalization,” applies these seven principles to four
key areas: the international trade regime, global finance, labor migration, and global labor flows and
how to accommodate China in the World Economy. The book finishes with a cautionary afterword:
“A Bedtime Story for Grown Ups”—the story of a little isolated fishing village . . .
I disagree with Rodrik’s assertion that a return to national states and national sovereignty provides
an answer to the current woes. I contend that the dichotomy between international markets and
national laws and policies can be best tackled by the internationalization of the rules and institutions
governing global markets. The answer, in my opinion, is more international law and less national
law. This is particularly needed in international finance where formal international law is sorely
missing. Reliance on national law and soft law international standards was a contributing factor to
the global financial crisis. The dichotomy between national rules and global financial markets
reached its zenith with the collapse of Lehman Brothers. Formal international law has legitimacy and
is in accordance with the principles of democratic politics. By formal international law I mean “hard”
international law, which emanates from international treaties. In addition to concerns about
democratic legitimacy, the greatest limitation of international soft-law is the lack of effective
enforcement, since it is only by its adoption into national law that it typically becomes enforceable.
What is the solution forward? I have discussed it elsewhere.1 In my opinion, the International
Monetary Fund, the institution at the center of the international monetary and financial system, is
best placed to adopt a role as a “global sheriff” with regard to international financial stability. Either
by creative reinterpretation of the Articles of Agreement of by an amendment of such Articles the
IMF can be formally given such a mandate.
When it comes to modern financial markets, sovereignty is an inadequate principle to deal with
financial conglomerates, complex groups and, generally, with cross-border institutions and markets.
It is not a good principle to deal with crisis management either, nor with the home–host country
divide. Indeed, like a tsunami that does not respect territorial borders, the effects of a financial crisis
spread beyond geographic frontiers. In some parts of our modern life, we need to move beyond
national sovereignty. This has happened already in some regional areas, such as the European
Union, where countries have been ready to make sacrifices in terms of national sovereignty for the
sake of European unity. And it happens whenever countries sign international treaties.
Financial markets transcend national boundaries. And so do financial stability and systemic risk. It
may actually be in the best interests of countries to pool sovereignty in some areas. Drawing on the
lessons of history, it was in the context of World War II that countries were ready to make the
sacrifices needed in terms of sovereignty by signing a number of international treaties that gave rise
to international organizations such as the United Nations, the International Monetary Fund, and the
World Bank. John Maynard Keynes had wisely stated that in order to win the war we needed to “win
the peace.” It was this understanding that also inspired Henry Morgenthau (then US Treasury
Secretary) to proclaim in the opening remarks of the Bretton Woods conference in New Hampshire
in July 1944 that “prosperity like peace is indivisible.” Neither Keynes nor Morgenthau were thinking
only in territorial/national terms: they were thinking in international terms. This international frame
of mind does not imply a negation of sovereignty in all areas of our life. But we need international
organizations with adequate mandates and international rules for markets to prosper.
Overall, I found the book highly enjoyable. I agree with Rodrik’s skepticism about the hedgehog
types of economists, who promote one big idea regardless of context. As he lucidly points out, “the
‘science’ of economic policy is not like physics, where each generation of ideas successively displaces
the previous generation’s. At best, we learn how to tackle the complexities of the world a bit better
with each new wave of research” (p. 133). Indeed!
Footnotes
↵1 See, e.g., Rosa Lastra, The Quest for International Financial Regulation, Inaugural Lecture,
23 March 2011, http://www.law.qmul.ac.uk/docs/podcasts/50504.pdf.
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