Dani Rodrik on Globalisation

The first book on your list is Power and Plenty by Ronald Findlay and Kevin H O’Rourke. Can you tell me a bit about it and why it’s on your list?

This is really a magisterial tour of the last thousand years of globalisation. It’s written by two economists who also happen to be superb historians, and they go back to the year 1000. For me two things about this book stand out. One is it’s a very valuable reminder that globalisation has a history. It’s a history that goes back not just to 1980, not just to 1945, not just to the so-called first era of globalisation of the 19th century – but all the way back to the Mongol conquests and the manner in which inter-continental networks of trade were spawned throughout history. In other words, globalisation is very old and has been with us for a very long time. The second useful thing that comes out of it, and in a way the main theme of the book, is that political power and economic globalisation have always been intertwined. Economists have a tendency to think of economic globalisation as something that emerges purely out of the instinct of humans to want to barter and exchange. What the book shows is that the ebb and flow of globalisation have been intimately linked with military conflict, with the rise of political power, with competition among the great powers. And we miss a lot of the picture if we don’t understand that behind economic globalisation of any kind is a certain structure of political power.

How is that knowledge useful to us today?

It helps us realise that each type of globalisation has to be backed by certain configurations of power. And, as those configurations change, we need to think about a somewhat different type of economic globalisation. So the immediate post-war period, the Bretton Woods period of economic globalisation, was underpinned by US political dominance in the world economy. The World Bank, the IMF, the GATT and WTO were made in the image of what the US wanted to construct. It was, fundamentally, an extension of US power, just as the 19th-century globalisation was an extension of British naval power and British imperialism. What that means, going forward, is that as the US power recedes and we go into a multi-polar global system, it renders fundamentally impossible the type of economic globalisation we’ve had in the past few decades. So we need to think of a new kind of globalisation that is going to be underpinned by a multi-polar system, a much more heterogeneous configuration of political power at the global level.

And does your own book offer some clues as to what that new system should look like?

Yes, I would hope so!

Before we get to that, tell me about Global Capitalism: Its Fall and Rise in the Twentieth Century by Harvard political scientist Jeffry Frieden.

This book is also historical and takes a much closer look at the last two centuries of economic globalisation. What’s very useful about it is that it underscores that economic globalisation is not inevitable: Frieden spends a lot of time looking at the collapse of globalisation in the interwar period in the 20th century. The book is also very good at underscoring the domestic political prerequisites of globalisation.

How does that relate to what is going on now?

I think the lesson is very much with us. Right now we are going through a period when globalisation is being questioned, for the same kinds of reasons that it came under attack and was overwhelmed during the interwar period. The fundamental question is about the compatibility between a system of politics that is still organised around nation states and a global economy where national economies are intertwined and markets have gone global. I think these two things – the domestic nature of politics and the global nature of markets – are fundamentally in tension. It was the mismanagement of this tension that led to the collapse of the gold standard in the earlier era of globalisation – an episode the Frieden book describes so well – and the future of our current round of globalisation will depend on exactly our skill in managing the same tension now.

You think the pressures now are as severe as they were back then?

Very much so. There is political tension between the groups who are largely the beneficiaries of economic globalisation – either because they’re internationally mobile like firms or because they have the kinds of skills that allow them to prosper in the global economy – and those who are not so lucky. Those who are not so lucky are, in many countries, still a large majority of people and they want their democratically elected governments to be much more responsive to their needs, at a time when governments just say: ‘Globalisation made me do it! I can’t do anything else!’ It’s this tension that we need to be grappling with.

But don’t you think people have a better understanding of the economics now, which means globalisation is less at risk? Fifty years ago many people believed that Communism was a viable economic alternative – whereas today, even if you’re very left-wing, you realise you need to pay attention to the dynamics of the market or else it’s likely to end in disaster…

Yes. I think one good thing is that pretty much everybody understands that there really is no alternative to market-based systems. But that still leaves huge room for argument about the type of market system. If you look at the national economies of different countries, they have very different kinds of market-based systems. The US economy is very different from the Swedish economy, which in turn is very different from the French economy, which in turn is very different from the Japanese one. And all of them are very different from the kind of market economy China is. So there are many, many different ways of constructing a market economy. What is the role of the state? What is the role of the welfare state? What is the role of regulation? How much redistribution should there be? What should the tax system look like? What should the consumer safety regulations look like? How organised should labour markets be? These are all questions that different societies have to resolve for themselves. But global markets are fundamentally hostile to heterogeneity on these questions, so what economic globalisation tends to do is push for uniformity, to push for similarity in standards and regulations. It is not entirely clear that this is desirable – either politically or economically. And it’s certainly not inevitable in any way – because it’s up to governments and policy-makers to decide to what extent they want to go down that route.

Your next book is by Berkeley economist Barry Eichengreen. How does it fit in?

Globalizing Capital focuses specifically on financial globalisation and the history of financial globalisation. What I like about this book is the clarity with which it describes certain dilemmas that financial globalisation creates. Those dilemmas are very much the same ones that we’ve been discussing, but here we see them specifically in the area of macroeconomic policy. The gold standard came to an end precisely when the assumption that domestic economic policy should be driven by the needs of an international gold standard, at the expense of any kind of domestic policy objective, became untenable. What had sustained the gold standard in the 19th century was the idea that monetary policy didn’t have to have any domestic objectives. The only priority for monetary policy was, first of all, to keep a fixed parity to gold, and secondly, maintain open capital flows. What happened when those objectives came into conflict with domestic employment or domestic price stability or domestic economic growth? The standard gold standard answer was that you just had to grin and bear it – no matter how costly it was going to be.

But by 1931, when Britain came off gold again and the gold standard began to unravel, the domestic polity had changed significantly – with the organisation of the world’s working classes, with much stronger trade unions and the expansion of the franchise. The presumption that domestic macroeconomic policy could be insulated from the pressure of these domestic organised groups in a more democratic environment became untenable – and Britain said to hell with the gold standard. That lesson – which the Eichengreen book describes in great detail – is again something that is very much with us. We keep learning it over and over again.

For example, it’s the lesson that many countries in Europe are having to learn right now. Those countries that are in the Eurozone are essentially in a fixed exchange rate arrangement, just like the gold standard. In order to maintain that fixed exchange rate, their common currency, they are having to make their economies go through very, very wrenching, and costly adjustments. If Greece and Spain and Portugal and Ireland are living with it, that’s presumably because they think there’s a greater benefit to being members of the European Union, to be part of some kind of political union of the future. So there’s some compensating benefit.

In 2001/2002, Argentina went through a similar kind of experience. In that case there was no compensating benefit so that the Argentines eventually ended up renouncing the fixed exchange rate and stopped repaying their external debt. So this kind of experience keeps coming back. On the one hand, you want to put on the golden straitjacket and hope that it will lift you up. On the other hand, the golden straitjacket becomes very expensive at times of stress, and then the temptation to throw it away becomes way too strong.

Is he also looking at inflows and outflows of capital causing instability, the Asian financial crisis and other crises we’ve had?

Yes, very much so. Financial crises are a recurring feature of financial globalisation and we see that going back to the various banking crises under the gold standard, the highly turbulent 1920s, and then, increasingly since the 1980s, a series of sovereign debt and financial crises that have rocked the world economy. Eichengreen does a very good job of giving us that story too.