Odd Lots - 51: Why Everyone Is Freaking Out About Globalization

Episode Date: October 21, 2016

Dani Rodrik, a professor of International Political Economy at Harvard University, was writing about the downside of globalization before it was cool. The rise of Republican presidential nominee Donald Trump, the U.K.'s decision to leave the European Union and the expansion of nationalist political parties around the world has since given fresh impetus to the notion that globalization isn't working for everyone. In this episode we discuss how we ended up with 'hyperglobalization,' what the technocrats got wrong, and what exactly can be done to fix it.See omnystudio.com/listener for privacy information.

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slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Put knowledge to work and grow your business. with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at cIT.com. Put knowledge to work. Welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway, executive editor of Bloomberg Markets. And unfortunately, my normal co-host, Joe Wisenthal, is away this week. He is off globe-trotting to some very exotic locations on a business trip for Bloomberg. So I thought as a sort of protest episode that Joe gets to go on an amazing trip to some very nice places with very good

food and very luxurious scenery, we are going to talk about globalization. And specifically, we are going to talk about the negative aspects of globalization. And here with me today as a replacement co-host is Sid Verma. He is one of the newest members of the Bloomberg Markets team. Say hello, Sid. Hi there. So, Sid, you are actually the perfect person to talk about this because you've done an enormous amount of work on globalization and cross-border capital flows and development over the course of your career, right? Yes, for the last couple of years, I've written quite a lot about the opportunities and challenges brought by unfettered capital flows and the backlash against some trade policies that have been implemented at the behest of Western-backed institutions.

So, yeah, I'm really excited to have this conversation. It seems like it really is the sexy topic of the moment. We've obviously got Brexit vote, the rise of Donald Trump this year, declining trade flows, rising income inequality, political populism. It all seems to nurture a growing view that globalization isn't just out of fashion. It's on life support. And our guests today, I actually really like the way you described him earlier. It's Danny Roderick.

He's an economist. He's also a professor of international political economy at Harvard. And you kind of said he was the original guy who started writing about all the negative aspects of globalization, before it was cool, right? Yeah. He refused to join in the congratulatory party two decades ago. And he argued that economists probably overstated the benefits of globalization and that policymakers probably risk a backlash if they push ahead with unfettered free trade

and capital policies. So he's exactly the right economists to talk to on this topic. Right. And in retrospect, it seems like the notion that a backlash was coming, was very, very prescient because here we are in 2016, and everyone's talking about the downsides of globalization, unfettered trade deals rightly or wrongly, I should say. Well, without further ado, Danny Roderick, thank you so much for joining us today. Nice to be with you, thank you.

Should we maybe start with this idea of a backlash? You know, to what extent was the criticism that we are seeing now of globalization, to What extent was that inevitable based on what's happened over the past two decades and beyond? I think it was pretty inevitable. I mean, it seemed clear to me that the opposition was going to be building up. I guess I wrote a little monograph a couple of decades ago called Has Globalization Gone Too Far. And then, you know, it was different kinds of characters that were sort of, it was Pat Buchanan. And, you know, in Europe it was the truckers protesting and the agriculturalists and sort of were, you know, sort of other kinds of people on the scene.

But the general trends were pretty easy to see and they arose from some basic fundamentals that the kind of overall economic benefits of globalization sort of began to be swamped by a lot of concerns about redistribalienals. distribution about what was happening to specific communities, about the elites getting sort of uprooted from sort of their national setting and the larger gap opening up between the people who control the politics and what was happening and the ordinary people and sort of, you know, decision-making moving away from national capitals to weird places like Brussels or Geneva or sort of multinational. and banks, you know, in closed doors. And so historically, of course, this was also not the first time we were seeing this, that we've had an era of high globalization during the gold standard.

And it came to a rather abrupt end for many of the same reasons. I don't think we are up quite the same kind of crisis at this point. I think the kind of globalization we have has much firmer foundations than was the case under the gold standard. But I do think we have pushed it further than it can go either economically, actually, or politically. I like the idea that we're not necessarily facing a huge crisis when it comes to a globalization backlash. What exactly, can you spell out what exactly makes it different this time compared to, for instance, the end of the gold standard? Yeah. I mean, I think we're in a much better, you know, despite all the backlash, the fact is that we have much stronger institutions today compared to the 1920s and 1930s, the interwar period, when the gold standard eventually collapsed. We have much stronger governments that are providing much better safety nets.

We have global institutions that provide for much greater global cooperation, the World Trade Organization and the IMF, who had nothing like that in the interwar period. And by and large, I think that people have incorporated the lessons of the rampant protectionism of the 1930s. And I think even the populist, the way they talk about trade policy, it's historically speaking, it's a rather measured kind of protectionism. I don't think smooth and wholly would be something that even Donald Trump would bring up as something that you would like to reenact. So I think the intellectual consensus has actually shifted quite a bit. And even though they're a bit more down in dumps than usual, I mean, I think the political forces that push for open markets, you know, big multinationals or banks or the trade elite, they also happen to be much more, they're still politically quite powerful. So I don't see a fundamental breaking down of the system in the way that we saw.

But that doesn't mean that, you know, that we could, you know, we could, you know, seriously. mismanaged the situation and in fact fuel the rise of and the growth of populism. That I think, you know, the damage will be not just to globalization. I think the damage will be to our liberal democratic order. I think that's in fact a much bigger price to pay. So Danny, you mentioned the idea that globalization may in some way have been mismanaged. Can you spell out exactly what you mean by that and give us maybe some example? I think I timed a transition to the 1990s where I think we began to push for a model of globalization that I call hyper-globalization,

which is where gradually globalization turned into an end for itself rather than being a means to an end. And we saw increasingly governments negotiating deals or undertaking. changes and policies that began to constrain what they could do domestically, began to constrain the way that they could address domestic concerns and oversawled the benefits of the resulting arrangements and didn't pay a whole lot of attention to the disruption that those things would cause. I think if there were sort of two concrete things, one was the creation of the World Trade Organization in the 90s, which went significantly beyond any trade agreement that had been negotiated. And what really stands out about the WTO is that it reached significantly

beyond borders into deep domestic territory and economic policymaking, sort of broad sort of restrictions on what governments could do in the way of dealing with subsidies, in the area of health and safety standards, which. respect to intellectual property rights. And on the financial side, of course, even though this was not an international agreement, by and large, complete mobility of capital, particularly of short-term financial capital, became effectively the norm through the workings of the European Union and on a broader scale through the OECD. And I think this new set of understanding from the 1990s, on the one hand, complete mobility of capital as a norm and trade agreements

being no longer about tariffs and quotas at the border, but increasingly about domestic regulations and how those had to be coordinated and harmonized across countries. I think both made domestic economic policy making much more hostage, left it much more hostage to the sort of, you know, these anonymous forces of globalization and created this juncture between, you know, where, you know, the life that the ordinary people were living in their own economic existence and the kind of policymaking that happened at that sort of international globalization or hyper-globalization-driven sphere. We are going to take a quick break for our sponsors.

Put knowledge to work and grow your business with CIT, from transportation, to health care to manufacturing. CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at CIT.com. Put knowledge to work. We're back. Danny, I'm interested in this idea of globalization, hyper-globalization, if you

will, going too far. And I always wonder, how did that actually happen? Like, did politicians just wake up one day and realize that there was a lot of opportunity for them personally in creating these sort of supernational structures that they could then have careers in? Or walk us through how this actually happened? You know, it's a combination, as usual, of interest and ideas. On the one hand, of course, you had very specific interests at work.

And so in financial globalization, of course, there were banks that became bigger and were interested in removing impediments to capital flows and across borders. You had multinationals who wanted to get market access and therefore were interested in reshaping the regulations of different countries so as to remove impediments in terms of their being able to access these markets. So you had definitely interests at play. But there was also, you know, ideas. I mean, sort of the whole, you know, ideational context of how these things happen. in the 1990s had as its background, of course, sort of the notion that, you know, markets couldn't do much wrong, that governments, when they intervened, would on these sort of mock things

around. And that, you know, sort of that trade liberalization in the 50s and 60s and 70s had been, you know, had produced a booming world economy and therefore, which, by the way, is true. then the misleading conclusion was drawn that, therefore, this was the most important thing to keep doing. So effectively, a good thing was taken too far, in my view. And third, I would add that on top of, you know, sort of the general ideational context and the interests of various actors, I think there was a political failure on the part, particularly,

I would say, of the sort of, you know, what in the United States context we would call sort of liberals or left liberals and in Europe would be the socialist and the social democrats, a certain abdigation of their responsibility. And they bought into that whole story of how sort of moving on this hyper-globalization agenda either was something that was necessary that they couldn't do much about it or, as was the case in many cases, that this is something that they should actually back, that they should support. So somewhat surprisingly, some of the most avid supporters of financial globalization were the socialists in France or the Clinton Democrats in the United States. So I think, you know, sort of the political group that you might have thought would have acted as a break.

In fact, it was very much behind this push towards hyperglobalization. So I think that's, I think is sort of the combination of the form. that brought us to where we are. So where do we go going forward? The Trans-Pacific Partnership and the Transatlantic Trade Partnership deals look like they don't have sufficient political backing. The IMF has issued a mere cul-Pers saying that they have probably overstated the virtues of neoliberalism, which, you know, tends to argue for the wholesale privatization of companies

as well as a modest role for fiscal policy and fully open trade and financial borders. At the same time, you know, governments and the IMF are more sympathetic to the view that capital controls can shield themselves from volatility of international finance. So, you know, where are we going next? Are there sufficient number of, you know, is there a moral leadership on the international stage

to try and craft a new trading model? or is it just a model through scenario? Yes, so as I said earlier, I don't think the really bad scenario is one of a very high likelihood where we have a complete collapse of the world economy and globalization with all the really terrible political ramifications of the type that we saw in the interwar period. But leaving that aside, I think whether we take. a relatively good path or relatively ugly path depends largely on how the mainstream political groups react and that's both sort of you know center right center left parties and also the the technocratic establishment now I think both of these groups have have are sort of halfway down the line I mean

As you say, there has been a sort of mea culpa of sorts on a number of different dimensions. You know, that, you know, the free mobility of capital, I think sort of the consensus around that has dissipated. And even the IMF is saying, you know, that we need to, you know, accept that there are circumstances on which capital controls might make sense. And there's sort of, you know, wider agreement that, you know, maybe we needed kind of a different model on trade negotiations. But we're not quite there yet. And we see it, for example, in the way that an institution like the IMF responds to where we are. On the one hand, you have these sort of revisions in its thinking. On the other hand, you have Christine Lagarde coming out and saying that, you know,

we need to stay strong on trade. And the only way that we can progress is by signing more trade agreements. And it's very important that we do that. So I think, you know, the realization hasn't sunk in that the way that you respond to these things is not by, you know, simply doing a better marketing job on the benefits of trade. That's not the issue. The issue is that ordinary people feel that policymaking and the technocratic and policy elites are pursuing a set of interests which is not theirs. and the main constraint that the world economy faces right now is not that it is not sufficiently open. And so you need to sign new trade agreements.

The main constraint is that it's lacking the legitimacy in the eyes of the ordinary people that you need to sustain a moderately open economy. And once you realize that the main constraint is legitimacy, not lack of openness, then you have to really start thinking that what we should be doing is not pushing for more trade agreements, but really fundamentally revisiting what we are negotiating when we talk about trade. And we're not there yet. But, Danny, this is why I get confused, because when people talk about reforming trade or better distributing the benefits of free trade, it seems like by doing that by definition, you almost go into protectionism, right?

Because improving trade for one group is inevitably going to be good from their perspective and perhaps bad for someone else. So how do you make it better without automatically going backwards and entering a sort of protectionist, everyone for themselves, game? Yeah, I think one of the obstacles, in thinking creatively and productively about the world of trade is that we have this, you know, we think about sort of trade and what we're doing in trade as if moving in this unidirectional sort of road that goes from, you know, more open trade to less open trade. So it's, you know, the battle between protectionism and free trade. You know, this may have been the battle that we were fighting in the 50s and 60s and 70s,

and that battle has been won, and it's been won by free traders. But really, since the 1990s and since the World Trade Organization, trade negotiations and trade agreements are not about free trade. And so what we're really talking about is not protectionism versus free trade. A large part of the TPP is really about talking about regulations and regulations that are fundamental to running an open economy and a market-based system. The question is, where should those regulations be designed and what's the role of international agreements or global market forces in shaping those regulations?

So should corporations, for example, have access to a completely separate track in the way that they can pursue their interests? and impose their own preferences on certain, on governments when no other group, NGOs or labor unions or others have a similar ability. So, of course, I'm talking about the ISDS, the so-called investor-state dispute settlement system, which is part of the Trans-Pacific Partnership and other trade agreements. are we talking about, now we're talking about, you know, rules with respect to capital flows and capital account regulations and patent and intellectual property rights and, you know, what are appropriate rules in those areas for a country like Vietnam or for a country like Malaysia. And should those be designed by international agreement and should the main actors who are we, you know, shaping those regulations be banks and large among, national corporations. These are not issues that are helpfully discussed in light of a, you know, sort of protectionism versus free trade kind of a mindset because they're not about

those. And so that's why I don't think the issue is really the of, you know, if we don't negotiate TPP or TTIP that we're necessarily falling into a protectionist hellhole. The issue is, can we have better rules that address issues of fairness, of distributive justice, of equity, in a sense that people want to make sure that the rules and regulations that affect their lives are made democratically in fora, that they can actually openly participate in, are we allowing for democratic deliberation, sufficient democratic deliberation for the determination of such rules? So those are the kinds of issues, and I think they certainly are the ones to be discussed. I think that brings us quite neatly onto kind of two separate topics, whether it's trade globalization or financial globalization.

But one way of looking at slowing globalization is the fact that trade growth has been weaker than GDP growth in recent years. And that trade elasticity, so-called trade elasticity is projected to be weak. again this year. And I know that you say that that's a very blunt way of looking at, you know, globalisation, but it seems that trade volumes are weak and there seems to be an existential threat for emerging markets in the coming decades, given the fact that there are new manufacturing techniques that could, you know, increase import substitution and developed markets. To what extent are you concerned that emerging markets lack the comparative advantage from new innovative technologies such as driverless cars, 3D printing and new softwares? Because traditionally we know that for emerging markets to grow, they need to build out competitive manufacturing hubs.

Yes. I mean, first, I think the decline of trade volumes in relation to global output. in recent years, that I don't think has much to do with the populist backlash so far. So I don't think that's really driven through by the rise of protectionism. There are much, you know, sort of their supply chains are being sort of brought in home because of technological changes. And the slowing down of China is also a very big factor in that. So there are, you know, what's happening to trade recently, I think is largely driven by economic and technological changes and not by the politics around trade.

Although I do think that if we mismanage globalization, political risks and political barriers will start to play a role as well. But going back to the question of developing countries in emerging markets, I'm indeed very concerned by the fact that manufacturing is increasingly becoming skill and technology intensive and effectively comparative advantage in manufacturing is moving away from many low-income countries and then the traditional route whereby countries developed very rapidly was one of export-oriented industrialization. That's of course what China did before China, it's what South Korea and Taiwan did. Before them it was Japan. And what we see around the world these days

is that really a process of what I've called premature deindustrialization in low-to-middle-income countries that they are becoming deindustrialized at very low levels of development. Manufacturing isn't serving the kind of escalator role that it did. So, you know, it kind of country like Ethiopia that really should, is in some sense ideally placed to be the next sort of low-cost source for manufactured exports, you know, has received some Chinese investment, but I really don't see it developing in quite the same way that the East Asian countries did before. And I think technology has a lot to do with it. You know, when we start talking about, you know, 3D printing of shoes, you've suddenly, you know, taken away, you

one of the main mechanisms through which low-income countries developed, and you've taken that escalator away from them. So it is an issue that I think will mark developing countries in the decades ahead. And of course, going forward, financial globalization is a big question mark. Obviously, we have a dollar-driven global financial order, but there's nothing new under the sun and you have been warning for years about the risks of boom-bust capital flow cycles.

Are you concerned that maybe emerging markets are a bit too cautious to impose capital controls or moderate the pace of credit growth because there's a perception that open financial markets can boost growth when that that contention isn't necessarily, supported wholesale in economic theory. I am, you're right that there is, on the one hand, there has been an ideological shift, as we talked earlier, that even the IMF is not in favor of complete freedom of capital mobility,

understands that developing countries may want to use capital controls. On the other hand, in terms of practice, there is still a certain, amount of stigma, a certain amount of risks to policymakers from using capital controls. And I think what and where the IMF... I'm sorry? Could you give us any examples at all? Well, I mean, most, you know, sub-Saharan African countries still maintain large, maintain fairly open capital accounts.

And, you know, what they want to be is they want to be, you know, seen as, you know, particularly promising frontier market economies. So, you know, we have now this new notion that we're marketing, this frontier market economies, and then that sort of, you know, as recipients of capital inflows. And it doesn't seem like the right thing to do if you want to be perceived as a frontier economy to actively manage capital flows. So these countries are getting very mixed messages from official institutions and financial markets. And one thing that the IMF could be doing that it's not doing is actually provide, you know, active technical assistance to how capital accounts ought to be managed. So it's one thing to say that it's, you know, you should do it, maybe as a last resort, but it's okay. But, you know, policymakers in the developing world are really concerned that, you know, they don't know how to do it.

They worry that, you know, it'll be very easy to circumvent. controls, that there are not that many good examples around them. So I think that it becomes, you know, the relatively less risky thing to do for reputational reasons not to, you know, want to do anything. And I don't think international institutions are necessarily helping them all that much. We are going to have to leave it there, although I know we could keep talking about all of this for much, much longer. Danny Roderick, thank you so much for joining us today. It was a pleasure. So, Sid, that was your debut Oddlots podcast. I feel like we managed to cover quite a lot of ground. Let's see, we talked about hyperglobalization,

technocrats, premature deindustrialization. What kind of caught your attention the most? I think I'm a bit concerned about the policy prescriptions to try and address this big problem, because if you balkanise regulatory and legal policy at national borders, you're effectively increasing the cost of doing business and you therefore increase costs for goods and services. And that just unleashes bad inflation. I'm just not sure this idea that supranational bodies have just too much control and therefore we should be responsive to democratic concerns.

I mean, I guess I've now realised that I am a, authoritarian and I might be more right-wing than I realized. Yeah, the one thing I wish we'd asked is whether or not Professor Roderick is happy with the fact that all of these issues seem to be getting more attention, thanks to the rise of populist parties, people like Donald Trump or the Brexit campaign in the UK, or whether he's concerned about the way in which those discussions are actually happening and whether the way the discussions are unfolding ends up being detrimental for everyone. I don't know.

Yeah, I haven't seen anyone at Donald Trump rally hold up a sign arguing for control over pharmaceutical legislation. Right. So yes, there is a big disconnect between the populist debates and the policy debates. I also think China is the elephant in the room as well, because, you know, everyone argues that China should liberalize its capital currency and trade policies, and that can help, you know, rebalance its domestic economy and beef up its productivity. And if it does, it could boost global aggregate demand and give globalization a new lease of life.

But it seems that, you know, if you are against such liberalization efforts, China should continue maybe with its status quo. and it seems like that could be quite a controversial stance to hold. I feel like we are going to be talking about all these issues for quite some time to come. But again, we're going to have to leave it there for today. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Sid Verma.

You can follow me on Twitter at underscore Sid Vermeer. And Danny Roderick is also on Twitter. He is at Roderick Danny. Thanks for listening. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses.

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