Set against the backdrop of Donald Trump’s presidency and the Brexit vote, Straight Talk on Trade, the latest book by Dani Rodrik, is an attempt to ‘set the record straight’ on trade—about how (mainstream) trade economists should have listened to their critics who warned about trade imbalances and job losses, instead of sticking to economic models that assumed away unemployment and other macroeconomic problems. By exaggerating the benefits of free trade and downplaying its distributional and other costs for fear of empowering the ‘protectionist barbarians’, trade economists fed technocrats and elites’ obsession with hyperglobalization. The same is the case in many other areas related to globalization like financial globalization, the euro zone, economic development strategies, etc. In all of these, he argues, mainstream economists overreached while transferring the context-specific idiosyncratic results of particular economic models into policy advices. He laments that constructing a more honest narrative about the world economy would have prepared ‘us’ for the eventual backlash.
Like its predecessors, and especially his 2010 book The Globalization Paradox, the book criss-crosses the terrain between economics, politics and societal dynamics. It brings together the author’s popular, non-technical work on globalization, growth, democracy, politics, as well as economics. Drawn from his syndicated columns for ‘Project Syndicate’ as well as other articles and earlier work, and written in a lucid style, the book would be a good read for the interested non-academic on hyper-globalization’s ills.
Dani Rodrik has long been a critique of trade fundamentalists. In fact, when his first book Has Globalization Gone Too Far? was published in 1997, he was accused by mainstream economists and commentators of being a protectionist. Ever since, he has been repeatedly warning that hyper-globalization would lead to domestic social disintegration if the balance between markets and states is not recalibrated. Hyper-globalization has delivered outcomes which have alienated
the electoral base of traditional political
parties across countries, an opportunity grabbed by extreme Rightist forces across the developed and developing world.
Offering a counterpoint to the typical globalization narrative, he therefore claims to offer ‘a principled defence of the nation-state’ while re-looking at the question of whether the state is a hindrance, or indispensable to the achievement of desirable economic and social outcomes under globalization. Rightly, his narrative is articulated around a world that is not just politically divided but has heterogeneity in preferences (over risk, stability, equity, and so on) and institutions. Such institutional diversity prevents full economic globalization, which is what is desirable.
In this book too, the first chapter, ‘A Better Balance’ emphasizes how getting the balance right between economic openness and policy space management is of huge importance. The chapter titled ‘How Nations Work’ also discusses how the nation-state remains essential to providing the regulatory and legitimizing arrangements on which markets rely. But hyper-globalization, which have included trade and investment agreements that pushed globally harmonized rules into the domestic arena, have weakened domestic governance mechanisms. Addressing concerns that institutional competition as part of liberalization has set off a race to the bottom in regulations, he argues that the only area which has seen some kind of race to the bottom is corporate taxation. This however contradicts the reality on competitive financial liberalization and the lowering of labour and environmental rights in many developing countries in the pursuit of investments or to suit the interests of exporters. In fact, he contradicts himself as he presents evidence that the removal of capital controls (obviously financial liberalization), has been a major factor driving the reduction in corporate tax rates across countries.
In ‘Europe’s Struggles’, the author discusses the difficulties that deep economic integration raises for governance and democracy. He uses the Eurozone’s problems—deflation, unemployment and the rise of Right-Wing political parties—to highlight the undesirable problems that have been brought on by mainstream economists’ insistence on textbook style ‘structural reforms’ and deep integration. Based on hard evidence he points out that rather than economy-wide liberalization and big bang Washington Consensus-style structural reforms promoted by liberalization hawks, growth acceleration in several developing countries have been associated with growth strategies that focused on removing particular binding constraints on growth. This is important evidence that could be learnt from.
By contrast, despite all their ‘internal coherence’ and stylized logic, neoclassical models, which claim trade integration will bring about growth convergence across countries, are incapable of explaining why most poor countries remain poor while rich countries get richer and richer. They also fail to explain the dualism, informality and inequalities that exist in many a developing economy, even as inequality has become a feature of advanced economies as well. He discusses many of these country experiences in ‘Work, Industrialization and Democracy’. But more interesting in this long chapter is the discussion linking economic outcomes to democracy, and draws distinctions in development outcomes between electoral democracies, liberal democracies and autocracies.
‘Economists and Their Models’ and ‘The Perils of Economic Consensus’ elaborate on the central point Rodrik raises in the very beginning—that economists, as scientists, should accompany their endorsement of particular position on policy issues with the appropriate caveats related to context specificity, pre-conditions, trade-offs, etc. In ‘Economists, Politics and Ideas’, Rodrik makes the argument that vested interests ‘themselves are shaped by ideas’, or are in fact, ‘hostage to our ideas’. He does not mince words in stating that ‘those who chalk up the global financial crisis of 2008–09 to the power of big banks conveniently overlook the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street’ (p. 163).
In the next chapter ‘Economics as Policy Innovation’, Rodrik contests the common argument that political systems are stuck in suboptimal situations because powerful special interests block progress towards better outcomes. A persuasive case is made for overcoming vested interests with new policy ideas. Indeed, the most interesting and useful contribution of the book is found in this chapter discussing economics as policy innovation. He brings together a number of successful policy experiments in different country contexts for dealing with specific economic challenges, which sought to overcome political inertia over changing the status quo of vested interests.
In ‘What Will Not Work’, Rodrik argues that it is too late to compensate the losers of globalization and thus it is absolutely imperative to change the rules of globalization. In this context, there is a good discussion on the futile muddling of free trade agreements and the necessary role of capital controls. But Rodrik underplays the dire need for international cooperation and rules particularly in the area of finance when he discredits the role of global governance. When he places the onus of domestic financial and macroeconomic stability, full employment, investments in human capital, etc., solely on national governments, he conveniently neglects how sovereign states’ policymaking abilities have been circumscribed by international ‘rules’, the structural adjustment programmes and the resulting globalization itself—specific instances of which he has himself documented in other parts of the book. So when he says the policy choice is of national governments, it is not convincing. In fact, two among the seven commonsense principles of global economic governance that Rodrik discusses in the next chapter ‘New Rules for the Global Economy’ are clearly in response to the prevailing lack of economic sovereignty for many countries: ‘Countries have the right to protect their own regulations and institutions’; and ‘Countries do not have the right to impose their institutions on others’!
The penultimate chapter ‘Growth Policies for the Future’ discusses Rodrik’s growth policy recommendations, which he claims, are at once productivity enhancing and socially inclusive. In the final chapter on ‘It’s the Politics, Stupid’, he cautions that if globalization is not to be swept away by the backlash generated by its excesses, we need bold reforms in domestic and global governance, and not tinkering at the edges.
Rodrik has not been alone in declaring that standard economic models have been failing miserably to explain the real world economic churning because of which the discipline had begun to lose relevance. But he has done a disservice to not emphasize that this has been the plight of mainstream economics and that there has been a rich and growing tradition of heterodox economics which has been in touch with the lived realities of the real world. In a book focused on discussing the dominance of economic ideas and the influence of economists’ models in policies and global rule making, there is almost total silence on the contribution of various alternate traditions in the discipline. Heterodox economists have made a huge contribution in bringing the ills of globalization to the fore and improving the quality of public debate. The book is reluctant to pursue the central issue in a meaningful way despite the fact that there has been widespread questioning of the applicability of the theoretical constructs framed by standard models. In fact, there is also a growing worldwide movement to offer alternative textbooks for economics teaching, which has emerged out of the exasperation with the continuing undue hold of neoclassical economics over economics curriculum.
Despite repeatedly drawing attention to the successful country experiences with interventionist policies (aka mercantilist) which are shunned in the liberal models and the latter’s failure in explaining inequality, financial crises, etc., it is puzzling that Rodrik continues to credit mainstream economists—whose models he holds responsible for globalization’s excesses—with ‘intellectual victory’. Not an economist to shy away from calling globalization’s cheer leaders’ bluff, one only wishes that Dani Rodrik would have been bolder in this book with the benefit of the rich heterodox literature (including his own) and all the different country experiences during more than three decades of neoliberal experiments.
Smitha Francis is Consultant at the Institute for Studies in Industrial Development, New Delhi.
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Volume XLII/No 11/November 2018
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