The Blog

Globalisation Is In Crisis. How Should We Respond?


"We have to stop our jobs being stolen from us", insisted Trump. This struck a chord. With their wages stagnating, dominance declining, and voices ignored, many applauded a leader who would put American workers first. Across other Western democracies too, there's been a virulent backlash against globalisation.

So, how should we respond? In his new book, Straight Talk on Trade, Harvard Professor Dani Rodrik considers three options:

1. Defend the status quo

2. Make globalisation fairer

3. Protect local jobs from unfair foreign competition

Economists have long pursued Option 1: zealously defending globalisation, without admitting qualifications or uncertainties, neglecting distributional concerns. This is unhelpful, argues Rodrik, for economic globalisation has not lifted all boats. Competition from Chinese and Mexican manufacturing has led to long-term blue-collar wage depression and unemployment; not offset by employment gains in other US industries. Though Rodrik notes that trade's contribution to rising income inequality may be relatively minor, compared to technology.

To placate widespread frustration, political and business elites have becoming increasingly open to reform. At Hamburg, G20 leaders called for 'fair, inclusive and sustainable globalisation'. This has become the new consensus.

There are two ways this might be achieved: compensating the losers of globalisation; and/or enhancing global governance. After careful consideration, Rodrik rejects both as dead ends. National governments are unlikely to cede sovereignty to international institutions, or harmonise their diverse preferences (beyond a weak common denominator). Moreover, even when labour standards are incorporated in free trade agreements, they are seldom enforced.

So what about redistribution? Compensate globalisation's losers? Curiously, for an economist, Rodrik's approach is deontological rather than consequentialist. He asks about fairness and desert. Is it right that workers should lose their jobs to unfair competition, to labour and environmental practices that would not be tolerated in the US?

People who lose their jobs in the advanced economies on account of what would normally be considered unfair competition in domestic settings deserve more than a handout. They deserve the assurance that society regards such competition as unacceptable, in the same way that many other domestic exchanges are blocked. [to quote Dani Rodrik's email correspondence].

Import tariffs against social dumping might also improve outcomes: protecting US manufacturing jobs; and incentivising emerging economies to raise their labour and environmental standards. Perhaps Option 3 would lift all boats?

I'm not so sure. By raising making their imports less competitive, tariffs may deepen premature deindustrialisation in Latin America and Sub-Saharan Africa - which Rodrik terms 'one of the most important phenomena of our time'. Expensive imports would also raise costs for US consumers (who might benefit more from domestic redistribution: investment in health care, quality education, and retraining). Desert aside, blue-collar workers might not be better off.

I'm also curious why Rodrik's analysis of economic globalisation centres on trade deals between countries, rather than global production networks, and lead buyers' influence on working conditions therein. Manufacturers and governments often constrain wage hikes due to their fear that buyers will source from countries with lower labour costs. Buyers' purchasing practices (low prices, short-term commitments and short deadlines) can incentivise low paid, precarious labour. Further, given their desire for low costs, buyers are typically reluctant to establish complaint mechanisms, generate accountability, or amplify workers' collective strength to push for higher wages. Import tariffs, punishing poor countries, would not address this.

But would firms and governments ever submit to more stringent regulation? Notwithstanding Rodrik's pessimism, change is afoot. In response to sustained activism, The Netherlands has forged a multi-stakeholder agreement on garments, with companies submitting to full transparency in their supply chains, independent assessments, public disclosure, and a grievance mechanism, potentially enabling accountability to workers. This is one of several Dutch agreements, on international responsible business conduct. Similar, binding commitments have been developed in Bangladesh, and Germany. This week the UN Human Rights Council is preparing a legally binding instrument on business and human rights. Time will tell if Rodrik is right - his earlier book, the Globalisation Paradox, was certainly prescient.

Besides discussing trade reform, Rodrik also suggests how we can improve our analysis of the world. Building on Economics Rules, he urges economists to eschew hubris, engage with a diversity of models, learn from heterogenous perspectives, admit uncertainty, and recognise their limitations. Never mind economists, this is critical advice for us all. Or else we're damned to be wrong-footed in a perennial ambush: the Global Financial Crisis, Brexit, Trump, and doubtless more to come.

In thinking more broadly, we also need to recognise that ideas matter. While many political economists argue that income inequality persists if there are weak constraints on political elites, who resist redistribution for self-interested reasons, Rodrik illustrates the centrality of our beliefs, identities, conceptions of how the world works, and perceived impossibilities. Our evaluations of government policy depend on our identities, alliances and priorities. For example, blue-collar workers may forgive Trump's failure to reduce healthcare costs if they prioritise white nationalism (and his endorsement thereof). Beliefs also shape policy-making - ideas about what's feasible and politically acceptable shape government reforms. But these ideas can change - through experimentation, learning by doing, and thereby realising the efficacy of new alternatives. Crisis and rebellion also catalyse policy rethink. When elites' hegemony is threatened, they may become more open-minded. After the Great Depression, Franklin D. Roosevelt called for 'bold, persistent experimentation'. Perhaps the backlash against globalisation and inequality will invigorate this process once again.

But policy makers can only try new things, fail and explore another avenue if they are supported by careful, circumspect, heterodox analysis - as exemplified by Dani Rodrik. While I remain unconvinced by import tariffs against social dumping (neglecting global buyers), Rodrik's research remains pioneering, prescient, and likely catalyse to major public debate.

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