Book Review: "Τhe Globalization Paradox"

ECONOMICS REVIEW BY STEVEN PEARLSTEIN

Dani Rodrik's "The Globalization Paradox"

It is dogma among economists and right-thinking members of the political and business elite that globalization is good and more of it is even better. That is why they invariably view anyone who dissents from this orthodoxy as either ignorant of the logic of comparative advantage or selfishly protectionist.

But what if it turns out that globalization is more of a boon to the members of the global elite than it is to the average Jose?

What if most of the benefits of the free flow of goods and capital across borders have already been realized, and any gains from additional globalization will be outweighed by the additional costs in terms of unemployment, reduced wages, lost pensions and depopulated communities?
What if global markets, to be widely beneficial, require the kind of global governance structure that does not yet exist and that most people would oppose? What if it turns out that the countries that have benefited most from free-market globalization are not those that have embraced it wholeheartedly, but those that have adopted parts of it selectively?

In "The Globalization Paradox," Dani Rodrik demonstrates that those questions are more than hypothetical - that they describe the world as it really is, rather than as it exists in economic theory or in the imagination of free-trade fundamentalists.

A professor of international political economy at Harvard University, Rodrik has become one of the most powerful critics of what he calls the "hyper-globalization agenda" favored by the corporate community and academic economists. Rodrik laid the groundwork for his critique back in 1997, in his first book, which was published before the Asian financial crisis and the big anti-globalization protests. A decade and a monster global financial crisis later, he has now reframed the debate as one between "smart globalization" and "maximum globalization." Although his message is nuanced and rigorous, drawing on history, logic and the latest economic data, he manages to convey it in simple, powerful prose that any reader can follow.

 The starting point of Rodrik's argument is that open markets succeed only when embedded within social, legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared. Defenders of globalization have always noted that the richest countries tend to be those most open to the rest of the world in terms of trade and investment. Rodrik goes a step further by noting that the most open countries are also the ones with the biggest governments, the most extensive and effective regulation, and the widest social safety nets.

The reasons for that should be obvious, says Rodrik. Globalization, by its very nature, is disruptive - it rearranges where and how work is done and where and how profits are made. Things that are disruptive, of course, are destabilizing and create large pools of winners and losers. Any society, but particularly democratic societies, will tolerate such disruption only if there is confidence that the process is fair and broadly beneficial. That's where government comes in: Markets and government, Rodrik asserts, are "complements."

That was true as far back as the earliest waves of globalization, when the rules of trade were set by colonial powers, often operating through chartered trading corporations that became governments unto themselves. It was certainly true during the 19th century, when the bedrock of global commerce rose and fell and rose again with the gold standard. And it was true during and after World War II, when the new arrangements adopted at Bretton Woods, N.H., explicitly recognized that the operation of the global economy should respond to the social and economic needs of individual nations, rather than the other way around.

As Rodrik sees it, globalization began to run off the rails when it got hijacked by the notion that any restrictions on the flow of goods or capital across borders would result in great sacrifice to efficiency and economic growth. Not only was this free-market ideology imposed by the United States on developing countries through the interventions of the World Bank and the International Monetary Fund, but it was also imposed on the United States itself through a succession of free-trade treaties, the deregulation of finance and the retreat from any semblance of industrial policy.

The irony, Rodrik notes, is that the countries that experienced the greatest growth during the heyday of the "Washington consensus" were Japan, China, South Korea and India, which never embraced it. For years, they had nurtured, protected and subsidized key industries before subjecting them to foreign competition. They had closely controlled the allocation of capital and the flow of capital across their borders. And they flagrantly manipulated their currency and maintained formal and informal barriers to imports. Does anyone, he asks, really think that these countries would be better off today if they had played the game, instead, by the Washington rules?

The paradox, as Rodrik sees it, is that globalization will work for everyone only if all countries abide by the same set of rules, hammered out and enforced by some form of technocratic global government. The reality is, however, that most countries are unwilling to give up their sovereignty, their distinctive institutions and their freedom to manage their economies in their own best interests. Not China. Not India. Not the members of the European Union, as they are now discovering. Not even the United States.

In the real world, argues Rodrik, there is a fundamental incompatibility between hyper-globalization on the one hand and democracy and national sovereignty on the other.

Rodrik is at his weakest in trying to come up with a new framework for Global Capitalism 3.0, so I won't bother you with the details. The crucial message to take away from this important book, however, is that the worst thing we could do for the legitimate cause of globalization right now is to push it any further. In most countries, plenty of work still needs to be done to manage the economic integration that has already developed and to ensure that the benefits become more widely shared. Until that is accomplished, pushing things further will only create political backlash and set back globalization's cause.

In his famous treatise "The Wealth of Nations," Adam Smith acknowledged that "the division of labor is limited by the extent of the market." By extending the market as far as it can go, globalization offered the prospect of finally removing all limits to specialization by workers and businesses everywhere in what they do best.

Now comes Rodrik with a much-needed addendum to Smith's famous formulation, one that the Scottish philosopher himself would have admired: The extent of the market is limited by the workable scope of its regulation.

pearlstein@washpost.com

Steven Pearlstein is a business and economics columnist for The Washington Post.

THE GLOBALIZATION PARADOX

Democracy and the Future of the World Economy

By Dani Rodrik

Norton. 346 pp. $26.95