The Globalization Paradox, a great new book from Dani Rodrik

June 9, 2011

     By Duncan Green     

Dani Rodrik is one of the handful of heterodox heroes, prominent economists who took on the lazy thinking of the Washington Consensus Rodrikin its prime, and continue to dance productively on its grave. His latest book, The Globalization Paradox: Why Global Markets, States and Democracy Can’t Coexist, feels like a Big Book, one that may shape a new way of thinking about the global economy. It draws together several strands of Rodrik’s previous work on the WTO, growth take-offs, and the origins of the Global Financial Crisis into a single coherent whole. The result is one of the best critiques I’ve seen of the Washington Consensus. As he points out, with a paralysed global trade round, the collapse in financial globalization, and the rise of un-liberal China, the ‘stabilize, liberalize, privatize’ mantra of the early 1990s is wracked by self-doubt and well past its sell by date. A paradigm shift would seem imminent, but the old ways linger on partly for lack of a clear alternative. In The Globalization Paradox, Rodrik tries to address that gap. The central argument is that the global economy faces a ‘trilemma’. We cannot simultaneously pursue democracy, national self-determination and what he terms the ‘hyperglobalization’ of the last 30 years. You can have any two of three: nation states can hyperglobalize, opening up fully to global flows of capital and goods, but the result will include periodic crises and popular unrest that will have to be crushed if openness is to be preserved – democracy is inevitably the loser. For Rodrik, the preferred combination is a no-brainer: ‘democracy and national self-determination should trump hyperglobalization’, which should be put back in its box. Instead we should return to a new version of the ‘shallow multilateralism’ of the Bretton Woods system that held sway from 1950-80 and delivered unprecedented growth and social progress, with its pluralistic acceptance of capital controls, national opt-outs and industrial policy – what is now called ‘policy space’. That room for manoeuvre, and acceptance of diversity, is essential to restore stability to the global economy, disrupted by the monoculture of liberalization and one-size-fits all thinking. Rodrik likens this ‘thin version of globalization’ to keeping the windows open, but with a mosquito screen. You get the fresh air, but keep out the bugs. Beyond that, he rehearses his ‘growth diagnostics’ – that the road to success lies not in the ever-lengthening shopping lists of reforms advocated by the globalizers, but instead in identifying the ‘binding constraints’ – the most important bottlenecks in the economy – and focussing all your energy on them. As each bottleneck is dealt with, another will appear and must be tackled in turn. He credits such approaches (rather than the subsequent liberalization) for India’s remarkable economic take-off since the 1980s. But his ‘so what’ chapters go much further than this, first setting out seven general ‘principles for a new globalization’ and then looking specifically at how they could be applied to four big challenges: trade, finance, the rise of China and migration (the one area where he passionately advocates more, rather than less, globalization). glob paradoxRodrik doesn’t just dwell on policies and institutions, but on mindsets. In particular, he takes up Isaiah Berlin’s division of thinkers into two camps – the foxes who know lots of small things, and the hedgehogs who know one big thing. Rodrik is a militant fox, and blames many of the failures of the economics profession on its tendency to rampant hedgehogism – economists who, while aware of the nuances and caveats on any argument, still default back to ‘better to liberalize than not’. Or as Rodrik acerbically asks ‘why do economists’ analytical minds turn to mush when they talk about trade policy in the real world?’ When their recommendations don’t work, the hedgehogs say ‘that’s because we didn’t liberalize enough’ – after all ‘there is always something on the list that they haven’t gotten quite right and on which the crisis can be blamed’. Post Washington Consensus hedgehogisms include microfinance and individual property rights. The style is conversational, but sweeping and authoritative – professorial in the positive sense. Rodrik is less of a polemicist than Ha-Joon Chang, preferring to stay inside the tent, but he can pack a polite punch when necessary. It’s also historical – on top of the contemporary debates, you get the grand historical sweep of globalization from the 17th Century to the present deftly thrown in. If you haven’t read Rodrik’s previous work, this is a good place to start. I found the book more of a work of synthesis than genuinely surprising. One exception was his striking observations on China, where he ties the present arguments over global imbalances directly to China’s entry to the WTO. At that point, it had to drop its old forms of industrial policy (quotas, subsidies etc) and went for an undervalued currency that acted as an effective export subsidy and import tax combined. Result? Global instability. By his reckoning, eliminating the undervaluation of the Renmimbi would knock 2% a year off China’s GDP – no wonder its leaders are resisting pressures to devalue. Scrapping WTO restrictions and allowing China to return to a wider range of industrial policies would allow it to achieve its growth without destabilizing the global economy. Rodrik is only mortal, and an economist at that, so I felt mildly frustrated that even though he dwells on the central role of the state, he didn’t get into how effective states emerge, or are blocked, and what can be done about that. Without an effective state to heed his advice, you’re rather in ‘assume a can opener’ territory. He also proposes a pretty crude division of the world into democracies and non-democracies, with different rules for the two, which I’m not sure would withstand much scrutiny. But these are minor quibbles – the book is excellent. Last word to Rodrik: “We can and should tell a different story about globalization. Instead of viewing it as a system that requires a single set of institutions or one principal economic superpower, we should accept it as a collection of diverse nations whose interactions are regulated by a thin layer of simple, transparent and commonsense traffic rules. This vision will not construct a path toward a ‘flat’ world – a borderless world economy. Nothing will. What it wil do is enable a healthy, sustainable world economy that leaves room for democracies to determine their own futures.” And here he is launching the book at the Peterson Institute a couple of months ago. Powerpoint for the presentation is here If you still want more, Rodrik posted a number of other reviews on his blog. Or you could just read his book.]]>