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Speeches and Papers

Rodrik: The Globalization Paradox

by Gary Clyde Hufbauer, Peterson Institute for International Economics

Prepared remarks at the Peterson Institute event "The Globalization Paradox: Democracy and the Future of the World Economy"
May 4, 2011

Dani Rodrik has earned his niche in the pantheon of globalization skeptics, stretching back to the 18th century, including such names as Alexander Hamilton, Robert Torrens, James Bristock Bridgen, and Raul Prebisch. Like Dani, none of his predecessors would have embraced the label "globalization skeptic," if the term had been invented in the 18th century. But like Dani, all would have warned against "hyper-globalization," that magic if elusive tipping point where too much of a good thing becomes a bad thing.

Compared with contemporary keepers of the antiglobalization flame—Lori Wallach and Pat Choate—Rodrik is lower key and nuanced—if you will, the academic counterpart of Congressman Sander Levin who recently spoke at the Institute.

Despite Rodrik's engaging style, entertaining anecdotes, and reasonable tone, I found much to disagree with. I used so much red ink on my borrowed copy that I'll have to buy it. Provocation sells books.

No Gain

With limited time, I must ration my responses. Let me start with a footnote buried in chapter 3, Rodrik's citation to a study that, as a low-ball estimate, suggests that complete world free trade would increase US GDP by only one-tenth of 1 percent a year. One-tenth of 1 percent of US GDP is about the amount that the Harvard and Yale endowments lost in the Great Recession. I regard estimates of this trivial magnitude as ridiculous. By our calculations, globalization since 1950 is responsible for 10 percent of US GDP, and worldwide free trade would deliver another 5 percent.

But Rodrik believes that future globalization would have very little payoff, at least not for the United States. Where I foresee huge gains, he sees practically no gain.

But Lots of Pain

In Rodrik's world view, not only is future globalization divorced from gain, but more troubling, it would deliver pain. According to this account, "hyper-globalization" is a pain-pain proposition: pain in the advanced countries and pain in the developing countries. The sources of pain differ, but both groups of countries suffer from globalization.

Pain in Advanced Countries

Pain for the United States and other advanced countries is delivered by the forces of pauper labor. Rodrik does not subscribe to the crude pauper labor argument that elected Joseph Chamberlain a century ago—namely that free trade will reduce industrious British workers to the level of Indian coolies—but a more refined variant that mixes Stolper-Samuelson with the decoupling between American wages and productivity. In this story, trade not only erodes median wages, it undermines worker rights, health standards, and much more, because it pits American workers against Chinese workers.

The pauper labor argument is not completely false, but proponents grow a small acorn into a giant oak tree. Robert Lawrence will soon publish an Institute book that puts the acorn in proper perspective. Fred Bergsten offers his Hyde Park on Dupont Circle not only to Washington insiders but also to Harvard professors who disagree with one another.

If the pauper labor argument really explained the broad contours of income distribution and social standards, why is per capita income in Massachusetts 1.7 times the level in Mississippi? Why is Denmark 2.7 times Portugal? Why is Hong Kong 8 times neighboring Ghangzhou?

Casual observation tells us that Bill Gates and other information technology titans have destroyed far more low-skilled and medium-skilled jobs than all the US trade with China. Information technology and mass media have done more to tilt the distribution of income to the top 1 percent of Americans than all the globalization of the past two decades.

Casual observation also tells us that the political fight in Washington over the social safety net—exemplified by Medicare and Social Security—has everything to do with fiscal deficits at home and nothing to do with globalization.

To conclude this part of my discourse, the professor has rightly identified pain in the body of the American economy, but he has located its source in the wrong part of the political anatomy.

Pain in Developing Countries

Among developing countries, the pain from globalization is supposedly delivered by the straightjacket of rules imposed through the World Trade Organization (WTO), the International Monetary Fund (IMF), and other economic policemen. According to Rodrik, these institutions demand strict adherence to the Washington consensus, sharply curtail policy space, and as a consequence cut off promising avenues of growth.

As with the pauper labor argument, a kernel of truth instantly grows into a giant oak. In reality, WTO and IMF rules allow enormous policy space. Cuba was a founding member of the WTO, but when was the last case brought against Cuba for breaching WTO rules? Argentina, Venezuela, and Zimbabwe may well be members of the IMF, but it's hard to find a trace of the Washington consensus in their current policies.

The Globalization Paradox heaps criticism on "hyper-globalization"—that magic tipping point where too much of a good thing becomes a bad thing. In Rodrik's account, the nation state that passes the tipping point either loses its machismo or its people surrender their democratic rights.

The globalization we know in today's world of the WTO, free trade agreements, the IMF, and the World Bank doesn't begin to pose this threat. We are far from any tipping point, if indeed one exists. If China or India wants access to the US market for electronics or clothing, yes, they have to respect intellectual property rights and allow imports of machinery and chemicals. If Greece and Portugal want emergency funds from the European Central Bank or the IMF, they must submit to conditions. But these rules fall far short of any meaningful identification of a tipping point.

Let's take a political unit that actually exemplifies hyper-globalization, namely the United States. I used to live in New Mexico, which borders Arizona, Texas, and Utah. Yet within this geographic cluster, the variation in state policies is substantial—taxation, public subsidies, zoning, education. Between Nevada and New York, the differences are even greater. Hyper-globalization, as actually practiced, allows ample policy space for subfederal political units.

To conclude this part of my discourse, the straightjacket is not a straightjacket at all, but rather a loose-fitting multicolored Hawaiian shirt.

False Trilemma

Out of exaggerated pain, Rodrik has constructed a trilemma. Economists love trilemmas—our profession has a bad case of Triffin-envy. How splendid to declare: "I have spotted contradictions between desirable objectives that my dim-witted colleagues missed; not only have I spotted them, I have resolved them! Eureka!"

In this instance, "Eureka!" is premature. There is no deep contradiction between democracy as we know it in advanced countries, progressive globalization that has fostered enormous prosperity worldwide over the past 60 years, and the power of nations to run their own affairs. I will cite three examples where globalization fostered democracy, with no material loss of national sovereignty: first the expansion of the European Union to 27 members, many of which, prior to accession, were not models of democracy; second the democratic revolution which swept South America in the 1980s and 1990s; and third the transformation of Mexico from a closed one-party state to an open democracy alongside NAFTA in the 1990s.

Missing Literature

Let me conclude. As I read the The Globalization Paradox, I searched the index for familiar names. With some relief, I didn't find my own or Jeff Schott's—it's hard to imagine that anything written would be flattering. I did find Simon Johnson described as a latter-day Saint Paul, a sinner who saw the light on the Road to Damascus. Since Rodrik believes that the gains from globalization are slight, not surprising was the absence of such giants as Joseph Schumpeter, Mansur Olsen, Raymond Vernon, Angus Maddison, and David Romer. Last year, Kati Suominen and I published a volume entitled Globalization at Risk. We identified many hazards, springing out of populism, state capitalism, and the financial meltdown. If we publish a second edition, we will add Dani Rodrik to the list.


Op-ed: The Payoff from Globalization June 7, 2005

Paper: The Payoff to America from Global Integration January 2005

Paper: Answering the Critics: Why Large American Gains from Globalization Are Plausible May 2008

Book: Has Globalization Gone Too Far? March 1997

Book: Why Does Immigration Divide America? Public Finance and Political Opposition to Open Borders September 2005

Policy Brief 01-2: A Prescription to Relieve Worker Anxiety March 2001