The Post-Globalisation Economic Model (4 min read)

Dani Rodrick. Straight Talk on Trade: Ideas for a Sane World Economy (Princeton: Princeton University Press, 2018), 336pp. Reviewed by Bilal Hafeez.

The Post-Globalisation Economic Model

Harvard economist Dani Rodrik was one of the earliest sceptics of globalisation. He’s best known for coining his ‘trilemma’ for the world economy, which he stated as:

‘…democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full’.

His key insight was that a pursuit of hyper-globalisation – that is, selecting policies that favour the integration of economies – would lead to an erosion of either democracy (politics moves to a federal level, as in the EU), or the nation state (wherein domestic interests are subordinated). In identifying this ‘trilemma’, he was arguably prescient of the current populist backlash against globalisation.

The Nation State Matters

In Straight Talk on Trade, Rodrik deepens and elaborates his perspective on the post-globalisation world. Critical to Rodrik’s thinking is the importance of the nation state. For all the talk of global citizenry, most people still identify more closely with their country rather than their region or their continent of residence. Moreover, markets require rules and norms, and these invariably arise from the nation state. Crucially, market-supporting rules are not uniform – the US (corporate governance, finance), Europe (social democracy) and Japan (industrial policy) all have different sets of rules, yet all have successful market economies. Maintaining nation states, then, creates a diversification that Rodrik argues makes a more robust global economy.

Unbridled Globalisation

Rodrik is critical of the tendency within the economics profession to elevate the positive features of globalisation above all else. His book finds that there is little evidence for the argument that poor countries can only develop when advanced economies have no barriers in place against them. For example, East Asia prospered when Western economies had numerous import barriers. And much of Western Europe prospered under the Bretton Woods arrangement of restricted cross-capital flows and services trade in the aftermath of the Second World War.

From the 1980s, the shift to hyperglobalisation through WTO saw free trade extend to services, intellectual property, agriculture, and pharmacy. Domestic governance was weakened and global rule-making was beyond local debate. Ironically, the biggest success during this time was China, which was more cautious and played by Bretton Wood rules rather than hyperglobalisation.

Free Markets and Growth

The impact on economic growth of free trade and broader ‘free market’ structural reforms such as labour market flexibility, privatization, and enforcing property rights, is limited. Looking at 80 cases of 8 year+ growth accelerations between 1957 and 1992, Rodrik found a limited correlation with structural reforms. If one factor had to picked, it was the implementation of pro-private sector business, rather than pro-market reforms. For example, India and China reversed its opposition to the private sector in the early 1980s and saw growth pick up well before its market reforms of the early 1990s.

Manufacturing Was Key

Beyond these short-term growth spurts, all successful economies – whether East Asia or earlier the US and Germany – have relied on rapid industrialisation. Manufacturing comes with readily imitable and implementable foreign production technology, and unskilled farmers can quickly convert to more productive factory workers. The service sector requires more skills and institutional capabilities for comparable productivity gains. The latter is exemplified by India, which has a vibrant IT sector but which also struggles to absorb the broader population within that sector.

The trouble now is that the possibility of industrialising may not be available for most countries. Every decade since the 1970s has seen lower a share of industrial employment. It appears that rapid technological progress has reduced manufactured prices relative to services, which discourages newcomers. Manufacturing has also become more capital and skill intensive. Trade openness and the rise of China has also reduced the opportunities to restrict imports. According to Rodrik, East Asia could be the last region to successfully industrialise.

Reboot Economic Policy

The path to developing, Rodrik suggests, lies in massive economy-wide investment in human capital and institutions. This is in sharp contrast with selective reforms of industrial policy. So more investment in soft infrastructure like education and less on physical plant and equipment.

It would also entail reforming the WTO, which is currently heavily geared towards anti-dumping – that  is countries that price their exports below costs. The WTO focuses less on industry subsidies or unfair labour or environmental practises.  A relaxation over ‘social dumping’ would protect domestic standards. This could also reduce backlash against globalisation.

Bottom line

According to Rodrik, the economic case for globalisation has been overstated and the importance of the nation state for the functioning of markets has been understated. Worryingly, the development model of East Asia, and before that US and Europe, that relied on manufacturing may no longer be available to others. A shift to building the institutions that foster a vibrant services sector needs to be focused on. But this will take longer. Crucially, the WTO needs to incorporate the concept of social dumping.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

Reviewed by Bilal Hafeez, Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Hobbies? I read like crazy, watch lots of movies and love passing to others any wisdom I’ve picked up on work, relationships and life in my blog.

Bilal Hafeez can be contacted here.