In an interview on Globalisation

On to your last choice, Karl Polanyi’s 1944 book, The Great Transformation.

The Great Transformation is the sort of book that you will only get after reading it three times. Well, that’s what happened to me. It’s one of these books that have the greatest reputation, but are in some sense hardest to read. But it’s worth reading. It’s really a history of the spread of markets, the spread of the gold standard. It makes a rather important point, especially if you have spent a lot of time studying economics. You tend to think of economics, or the economy, as an independent sphere of society, that economies tend to be self-standing and self-supporting, almost independent from the rest of society. Then you start to say ‘Politicians shouldn’t interfere in the economy, because it worsens resource allocation’, and things like that. What Polanyi’s work underscores is that this is never how an economy has actually worked historically. To use his terms, the economy has always been embedded in society, and that when we try to disembed it from society and treat it like an independent institution – ie not dependent on societies, values and other institutions – then we’re really going to run into trouble, political conflict, social and economic instability and some kind of backlash. I think the big lesson from Polanyi’s work is that, as we keep rethinking the institutions of economic globalisation, we need to ensure that those mechanisms are fundamentally responsive to the values and demands of society and that if we lose track of that, then we risk another set of instabilities and an eventual collapse of globalisation.

Do you want to give a specific example where this is particularly relevant right now?

I think the financial crisis we just went through is a very good illustration. For too long we lived off this fiction that financial markets could exist independently, that they could regulate themselves, and in this fashion they could be a foundation of wealth and well-being. What we found is that actually financial markets, left to themselves, are a very dangerous weapon. They need to be built on top of some very strong regulations and the moment you start talking about regulations then of course you have to ask: what are regulations for? That requires figuring out all sorts of questions. What are society’s values? How much income inequality is desirable or feasible? What should earning differentials be, how much is OK? How much should financiers/bankers earn that is OK? What role should finance play – supporting the real economy, as opposed to the real economy supporting finance? What is the right trade-off between financial innovation and financial stability? The more we allow finance to innovate, the less stability you’re potentially going to have because of the risks that are generated. And each society may have different answers to these questions, and that has very important implications, going forward, as to how much financial globalisation we’re going to have.

I would say that we are making a very big mistake to assume that we can go back to a world of extreme financial globalisation, because that’s inevitably going to leave the regulatory underpinnings of the system very weak; it’s going to set us up for another financial crisis in the future. I’d much rather see us being much less ambitious on financial globalisation and have much more sound regulation at the domestic, national level. So I think Polanyi’s book has very real implications for how we think about the future of financial globalisation.

So what does your own book recommend we do? Do you want to tell me a bit about it?

The book is also fairly historical. It goes back to the 17th century and talks about an early model of globalisation that was sustained by chartered trading companies. It describes the 19th century and the collapse of the gold standard and then comes to the present. Part of the book is historical, part of it is a survey of economists’ ideas about globalisation, and how they’ve gone back and forth from the silly to the more reasonable. It gently pokes fun at various economists, both dead and alive, for their ideas and I lay out what I call the political trilemma of the world economy. I say that of the following three things – national self-determination, political democracy and hyper-globalisation – we can have at most two, and that we need to make an explicit choice as to which two we want. Many of our troubles stem from the fact we seem to be pushing for all three things simultaneously. We want more economic globalisation, while we embrace democracy and our national sovereignty, and that’s an incompatibility of the first order.

And what do you advise?

I advocate giving up hyper-globalisation. It’s not an argument against globalisation per se, but it’s an argument against an extreme form of globalisation or pushing for increased globalisation. Because both democracy and national self-determination are also important values. We will have a better, safer, healthier economic globalisation if we accept – and do so explicitly – that democracy will remain mostly a national phenomenon, and that national self-determination is a value in and of itself, because each society has the right to select its own institutions and rules and regulations. And once you accept those, then you have to give up an extreme form of globalisation, and act accordingly.

But if you give up on deepening globalisation, don’t you make it harder for poor countries to develop? Isn’t it globalisation that has allowed a poor country like China to lift half a billion people out of poverty? How has China been able to do this? And why hasn’t it been replicated so well elsewhere?

I think every country that has been successful has managed to leverage globalisation with a domestic strategy. It’s always been a combination of a solid domestic growth strategy alongside the forces of globalisation. It is a careful, managed kind of globalisation that has worked. The countries that have simply opened themselves up to world trade and finance without a complementary growth strategy at home haven’t done that well.

Take China. Obviously without globalisation China wouldn’t have been able to grow as rapidly as it did. But China is not a simple story of letting globalisation work its magic. They, in fact, have opened up very gradually, very carefully and always after having established strengths in their domestic economy. It was on the basis of their domestic industrialisation that they progressively opened up to international trade and when they opened up to trade it was very partial too. It wasn’t ‘Let all the tariffs come down!’ It was through special economic zones, so only in parts of the country. They protected their state-owned enterprises so there wouldn’t be large-scale unemployment. They made sure foreign investors would transfer technology to their domestic counterparts. They entered the WTO relatively late, only after they had already become a manufacturing powerhouse. With respect to international finance, to this day they have capital controls, they prevent free inflow of capital and they’re intervening heavily to make sure that they have a very competitive currency – which effectively subsidises their exports and their manufacturing industry.

So China has had a combination of highly interventionist domestic policies to diversify and develop its industries alongside a policy of export-orientation and taking advantage of globalisation. This combination has been key. Other countries that have tried to take advantage of globalisation simply by lowering their barriers to trade and letting their capital flow freely such as the Latin American countries since the 1990s have actually done relatively poorly. 

It’s not a democracy but do you use China as an example in your book?

In my book I say that China has succeeded in globalisation because it has played the globalisation game by the Bretton Woods rules, referring to an earlier period in globalisation where there was a much better balance between the forces of globalisation on the one hand and room for domestic policy making on the part of national governments on the other. And I think those rules, the Bretton Woods rules, were and are much more conducive to successful economic development than those we’ve had since the 1990s – which progressively limit the role a national government can play in domestic restructuring.