June 24, 2011

Globalization and Democracy

Wallace Katz


A Review of  Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy, New York: W.W. Norton, 2011. 346pp. ISBN: 978-0-393-07161-0.

Dani Rodrik’s The Globalization Paradox is a practical book. It describes things as they are and not as proponents of globalization would like them to be. It defends national sovereignty and democracy against the threats posed by advocates of free trade. And it rehabilitates government as a necessary element in a market economy.

Economic globalization is both a fact – world markets, heightened trade, and vast increases in capital flows – and an ideology. Rodrik has no dispute with economic globalization as a real process, which fosters trade between nations and which sometimes reduces transaction costs. But he is dead set against the idea, which he calls hyperglobalization, that national and local constraints are irrelevant impediments to the beneficent operation of free trade. As many historical and recent crises have shown, unregulated global markets are unstable, prone to bubbles and collapse. Rather than irrelevant, national regulatory institutions and practices protect and support globalization. Markets depend on states and cannot work without them. National markets are “embedded” in states where democratic participation, safety nets, and anti-trust legislation controls business. In nations, the demos provides a constituency for the economy, whereas the sole constituency for global markets are the elites who profit from it.

Rodrik establishes what he describes as a trilemma. There is a contradiction between “the national scope of governments and the global nature of markets.” Hyperglobalization works to eradicate national regulatory authority and allow capital markets to operate without restraint. Hyperglobalization refuses the limits that democratic governance requires in the form of social legislation and the consent of the governed. Accordingly, it is impossible to imagine a deeply integrated global market in which national states and democracy could flourish; or, the converse, a world in which national sovereignty and democracy prospered and global markets were not weak. At some points in his book, Rodrik argues that a choice is necessary: if you want national sovereignty and democracy, give up any hope of deeply integrated global markets; if you want integrated global markets, state sovereignty and democracy must diminish. He believes, of course, that some balance between national states and global markets is achievable and he suggests that a contemporary form of the Bretton Woods agreement would do the trick.

Rodrik develops his argument thoroughly. The book is divided into four sections: the first is devoted to the history of economic globalization in the nineteenth and early twentieth centuries and to a discussion of the international management of trade under the Bretton Woods regime, the GATT agreements and, currently, the WTO (World Trade Organization). The second section deals with the foibles of finance in a global market and the third with how economic globalization affects poor or underdeveloped nations. The fourth section considers and rejects the idea of global governance of world markets and envisions a revised form of capitalism, which Rodrik describes as Capitalism 3.0., or a new and saner form of economic globalization.

Globalized trade may involve numerous “transaction costs,” meaning things without which trade could not take place, such as laws guaranteeing that the trade is legitimate or a trusted medium of exchange (money). Trade is often supported by trust, which results from extensive cooperation between buyer and seller; or by values that buyer and seller share, such as the belief that it would be wrong to sell each other damaged goods. The most common form of support for trade is government, which is why highly developed economies have more government than less developed economies. Though proponents of economic globalization often deny the necessity of government, markets, especially global markets, are inextricably connected to them.

In the immediate postwar era, trade agreements such as Bretton Woods and GATT recognized the need to balance the exigencies of global free trade against what governments required to accommodate their citizenry. These were agreements that espoused a moderate form of globalization in which trade was subservient to domestic policy objectives — growth, equity and the welfare state. Even though the United States was a hegemonic power, it supported an economic globalization regime that was multilateral and that operated through international organizations such as the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT). American power was certainly essential to these institutions, but they worked fairly and independently of American authority. They created a system of rules and rule enforcement as well as an institutional infrastructure for the postwar international economy.

GATT was highly successful; it created what Rodrik describes as “a golden era of globalization” (71), in which the volume of world trade grew at an average annual rate of seven percent from 1948-1990, much greater than ever before or since. It was successful because it was limited. Its goal was to create the maximum amount of trade compatible with the free operation of national policymaking and practice. By contrast, the World Trade Organization (WTO) initiated an era of hyperglobalization, in which domestic priorities were subordinate to global trade and finance. The integration of world markets for goods and capital became an imperative, requiring that all nations pursue market fundamentalist strategies such as low corporate taxes, stringent fiscal policy, deregulation, and diminution of union power.

Hyperglobalization guarantees that the price of some products will decrease, because they can now be imported from countries where labor is cheap. But for the same reason, hyperglobalization puts Americans out of work; what they manufactured is now made elsewhere. The redistributive consequences of the global free market affect workers disproportionately. They lose their jobs and experience enormous dislocation. Policies to mitigate the negative effects of hyperglobalization are scarce or ineffective: tariffs are self-defeating and safety nets or social programs to offset redistributive inequity are inadequate.

The financial crises of recent years are stellar examples of misplaced faith in economic globalization. Floating exchange rates, introduced in 1971, created instability in capital markets. Bankers and economists believed that this problem could be solved through financial deregulation or the relaxation of capital controls. Instead of being pegged to the dollar, currency values would be determined by the market, on the assumption that the market would improve the global allocation of resources. But what occurred was precisely the reverse of expectations. Capital mobility resulted in crisis, no less than 124 banking failures, 208 currency collapses, and 63 sovereign debt crises between 1970 and 2008. The cause was the gap between the vast reach of capital and the minimal scope of its governance.

Economic globalization and uneven development go together. In the global market comparative advantage always favors manufacturing nations – those who trade products with “added value” – as against nations who sell agricultural commodities or raw materials. But nations are not necessarily “stuck” where history or nature situates them. Japan, Southeast Asia, and China show that poor societies can rearrange the playing field through the creation of institutions that promote economic development and allow “competitiveness.” By various means, governments can intervene to enhance performance and control markets to their own advantage. Some unleash the vitality of private enterprise through a favorable “business climate” (Southeast Asia); others use market regulations of different sorts to protect the domestic economy while encouraging export trade (China).

Rodrik does not look to resolve the inequities of economic globalization through more globalization; he is no fan of global governance. He thinks it impractical and harmful. Though he favors the European Union (EU), he discusses at length the problems that exist even in a regional organization in which member nations have much in common – history, environment, relative economic equality, etc. He believes that global governance would serve only to spread risk, that the differences between nations make global standards unrealistic and unenforceable, and that human beings would shun global governance because of their attachment to national identity. He sets forth seven principles for a sane form of economic globalization (Capitalism 3.0), all of which follow from his first principle, that “markets must be deeply embedded in [national] systems of governance” (237).

The Globalization Paradox affirms an international trade regime that is less concerned with free global markets and more concerned with opening up room for nations to defend their own public space, to insure that open global markets do not destroy basic rights, social justice, and policies promoting growth. Rodrik uses existing provisions of the WTO to propound the view that nations be able to invoke “safeguards” – i.e., opt out – not merely to raise tariffs when imports threaten the domestic economy, but also to protect labor and environmental standards.  With respect to international finance, Rodrik allows for a minimal set of international guidelines to control capital flows, but his principal emphasis is on national regulation.  Whenever capital is exported to another country, it must follow the same rules as domestic capital: similar levels of capital reserves; similar disclosure requirements and trading regulations.

Rodrik is especially interesting on an oft neglected topic: labor market flows. There can be too much and too little economic globalization: labor markets fall into the second category. Rich nations limit labor flows, in spite of the fact that citizens of poor nations seek to emigrate to improve their incomes and life chances. Labor flow restrictions confirm global uneven development. One way to equalize incomes would be for the rich nations to accept qualified labor flows via open immigration policies that would allow migrants to fill jobs in rich countries for a period of five years. Policy violations would result in large fines for the migrants and for their home country.

The Globalization Paradox is not directed against economic globalization as such, but rather against the ideology of globalization, the market fundamentalist notion that economic globalization benefits everyone, that free trade is a definitive good, that economic globalization is an inevitability that renders the world “flat.” Rodrik correctly observes that markets cannot function without the support of states and that global capitalism, in its quest for free reign, corrodes the sovereign institutions that are necessary for its survival.

The setting is new – twenty-first century economic globalization – but the story is old. Capitalism’s corrosive character has always been the source of its instability. To some extent the contradiction that Rodrik defines, between national democracy and deep economic globalization, is a built-in feature of capitalist systems. Sometimes states manage to control markets; at other times markets control states. But there is nothing “natural” about either outcome.

One big omission in Rodrik’s analysis is the role of politics in advocating the ideology of economic globalization. Political will either promotes or contradicts market fundamentalism. It is always politicians who allow capitalist markets free reign or who endeavor to tame them. The deleterious effects of global capitalism over the last thirty years have little to do with the inherent nature of global capitalism and a great deal to do with neoliberal politicians like Reagan, Thatcher, Clinton, Blair and the two Bushes who sought to deregulate markets, ushering in thereby a global regime which, via industrialization, has exacerbated climate change and produced uneven development, poverty and inequality. Without a discussion of what might be called the politics of economic globalization, the analysis found in The Globalization Paradox lacks substance. In disregarding politics, Rodrik renders his policy suggestions irrelevant or utopian, because in the current political environment they are implausible.

A second problem with the book is it terminology. Hyperglobalization is an exaggeration that reveals Rodrik in one or another unsatisfactory guise. Either he means to overstate our present condition and make economic globalization more threatening than it is or he actually accepts the definition of economic globalization set forth by such propagandists as Thomas Friedman. Writers like Friedman talk a good game, but their view of the world is not only programmatically wrong but also inaccurate. The world is far away from being “hyperglobalized.” Rodrik takes the neoliberal ideology that Friedman espouses too seriously and overstates the threat posed by economic globalization to nation states. As his own discussion of the European Union demonstrates, both state power and national identity are strong, far more resistant to either the fact or ideology of economic globalization than he allows.

Democracy, however, is threatened, and not by economic globalization but by corruption. And again, the problem is political. In an era of extreme uneven development, the elites of the world – both in business and in politics – have made common cause against democracy. Their interests and the interests of ordinary folk are antithetical. They profit from uneven development, poverty and inequality and to protect their interests they collude against the citizenry and its needs. The market fundamentalism that Rodrik deplores is an ideology that justifies the power and status of these elites. Corporations may operate globally, but they practice politics in the nation state, aiming to free themselves and their firms from the rules and regulations of state governance. To speak of economic globalization or “hyperglobalization” as a challenge to democracy is too abstract. The challenge lies within, in the state itself.