Saving Globalization from its Cheerleaders

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Saving Globalization from its Cheerleaders

• National Trust Forum on Democracy, Globalization
  and Societal Welfare
• October 2007
• Dani Rodrik

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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 internationally-traded
  products

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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

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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.

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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.)

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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

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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

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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

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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.

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 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
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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)
• cf. trade and wages debate 20 years ago
• 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 growth literature 10-15 years ago
• Therefore, globalization requires stronger safety
  nets in the North and stronger institutions in
  the South.

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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
• Social safety nets
• In the poor countries
• 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?

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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?

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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
• 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
• EU versus NAFTA models
• One is hard because it entails legal,
  institutional, political integration
• Acquis communautaire (gt90,000 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

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Do existing barriers to international economic
integration constrain growth? (B)The role of
international trade
Source Anderson, Martin, and van der Mensbrugghe
(2006)
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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!
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Some intermediate conclusions

• The gains from further liberalization of goods
  and capital markets are small
• As long as the world remains politically
  fragmented and transaction costs emanating from
  jurisdictional discontinuities block deep
  economic integration
• But the losses from a real retreat from todays
  globalization would be huge
• Therefore, we should place a high premium on
  policies that make such a retreat less likely
• even if they run contrary (in the short run at
  least) to the market-opening 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

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Where globalizations constraints biterich
country examples

• Labor standards
• Domestic labor laws protect workers from
  displacement through the hiring of child labor
  should trade be allowed to contravene this norm?
• 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
• 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?

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Where globalizations constraints biterich
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, RD 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.

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Where globalizations constraints biterich
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)

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Where globalizations constraints bitepoor
countries

• Evidence and theory suggest that growth
  strategies require policy space
• From the Washington Consensus to a diagnostic
  approach
• Different fixes for different countries
• 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

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Where globalizations constraints bitepoor
countries

• Trade regime
• Agreements on subsidies, TRIMs, TRIPs, and other
  negotiations on services ? narrowing room for
  industrial policies
• International capital markets
• 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

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Where globalizations constraints bitelessons
of history

• Three interpretations of collapse of earlier wave
  of globalization, 1815-1913 (James 2001)
• Inherent instabilities in global finance
• Social and political backlash
• 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.

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Where globalizations constraints bitelessons
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)

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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
• Which, in particular, provide standing to
  beneficiaries of trade
• A development box for developing countries
• 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