Dani Rodrik's Has Globalization Gone Too Far?
Faux, Jeff
HAS GLOBALIZATION GONE TOO FAR? by Dani Rodrik. Washington D.C.: Institute for International Economics, 1997. 128 pp. $20.95. Ingainstream economists are getting a little nervous. The market for...
...Dani Rodrik has written a hedge for the profession...
...For example, no widely accepted model attributes to postwar trade liberalization more than a very tiny fraction of the increased prosperity of the advanced industrial countries...
...The point is not important when economists work their theoretical models...
...Of identified causes of wage inequality, imports and immigration make up a sizeable share...
...The confident assertion of the benefits of free trade is not based on empirical observation...
...Here Rodrik notes the inconsistency of economists who support a ban on child labor for goods produced in the United States, but oppose any attempt to ban goods from abroad made with child labor...
...The erosion of the protections it affords therefore threatens the social legitimacy of free trade...
...The real culprit, they claim, is technological progress and the demand for new skills that it generates...
...But he wants his fellow economists to recognize that economic globalization is causing some pain out there, which, if not attended to, could cause the neoliberal project to stall...
...But it becomes critical when they get up from their computers and give the nation advice...
...Rodrik's stunning observation is correct...
...Economists "believe...
...Over the last decade, a small band of economists, such as Barry Bluestone of the University of Massachusetts, Richard Freeman of Harvard, and Lawrence Mishel of the Economic Policy Institute, have built a strong statistical case linking -increased immigration and low-wage imports with the growing wage gap between the top one-quarter and the bottom three-quarters of the labor force...
...At first, the dominant neoclassical wing of the profession denied that any such link existed...
...But because the gains from increased trade are assumed to be so large, the cost is assumed to be worth it...
...It simply calls for workers to take less of a hit early in life and pay for it in their old age...
...The politician and the bureaucrat are despised, the trade unionist is mocked as irrelevant, and the investor everywhere is king...
...The third source of tension is the undermining of government by international trade pressures...
...Still, if his economic analysis were all one got from Rodrik's book, it would be worth reading...
...Thus, he advocates the standard policy package of shifting domestic spending from old-age insurance to training and unemployment compensation "without increasing the overall tax burden...
...trade is not enlarging wealth, but redistributing it upward...
...Rodrik argues that trade in general, not just low-wage imports, worsens income distribution...
...But read it carefully...
...Labor's greater vulnerability to market fluctuations undercuts its bargaining position vis-à-vis capital...
...What thermonuclear strategists were to the cold war, free-market economists are to the new global marketplace...
...When the evidence became undeniable, they dismissed its effect as small: they said that it explains no more than 15 percent to 30 percent of the rise in inequality...
...After twenty years of the pain of opening up to global markets, the typical American worker still does not see the gain...
...He points out that factors like technological change are also products of globalization...
...Rodrik himself is no contrarian...
...But Has Globalization Gone Too Far...
...FALL•1997•119 Books Rodrik thinks the dissidents have the better side of the argument...
...But there are signs that the world is having some second thoughts about the neoliberal model...
...As a result, a small shift in foreign workers' wages or in the global demand for a product or service can cause big shifts in the domestic demand for workers...
...The day I wrote this review, the Senate Finance Committee voted to cut Medicare benefits and raise the age of eligibility from sixty-five to sixty-seven, largely because of pressures from the financial industry to slash entitlements...
...The fact that his book was published by the Institute for International Economics, a bastion of free-trade orthodoxy, is a signal of creeping anxiety in the upper reaches of the economists' club...
...The evidence, therefore, tells us that the critics of free trade have been right...
...Even when under pressure to defend free trade, economists cannot deliver a substantial number...
...It is based on the theory of comparative advantage— the theory that if all nations specialize in what they do best and trade freely with each other, their incomes will be maximized—that lies at the core of Economics 101...
...Rodrik analyzes three sources of potential "tension" between global trade and social stability...
...But Rodrik's own frank admission that the calculation of costs of free trade are quantifiable while the benefits are merely assumed does not shake his confidence...
...In this case, an economic assumption has been mistaken for an immutable law: expanded trade, whatever the cost, is always justified...
...A professor of international economics at Harvard's Kennedy School and fellow of several establishment institutes, he is a firm believer in free trade and in the wisdom of moving toward one global marketplace...
...is more important than that...
...But everything else is not usually equal, and so the benefits of trade are often not equal to the costs...
...He concludes that support for government is weakening at the very time when it is needed to provide a buffer—largely in the form of social insurance— to protect people against the relentless pressures of dislocation...
...The first is the impact of foreign trade on domestic inequality...
...The market for their ideas is booming, of course...
...Therefore, concludes Rodrik, "The first-order effect of trade appears to have been a redistribution of the enterprise surplus toward employers rather than the enlargement of that surplus...
...At the time of the North American Free Trade Agreement (NAFTA) debate, for example, NAFTA supporters' estimates of the increase in growth it would produce came to less than the statistical margin of error in calculating the Gross Domestic Product...
...He concludes that economists should back off from the idea that unfettered trade should take priority over a nation's right to support its values...
...There is obviously much sense to the idea that specialization plus trade leads to more efficiency, everything else being equal...
...Rodrik notes: "When Rupert Murdoch goes on a global buying spree and replaces workers with machines at all the newspapers he acquires, it is not at all clear that the resulting labor-market pressures should be attributed to technological change rather than globalization...
...Rodrik is a sophisticated believer, so he can permit himself to wonder if the religion of globalization might have gone "too far...
...Economists are said to live by hard numbers...
...The book opens with references to the 1995 strikes in France, Pat Buchanan's campaign in the 1996 Republican primary, and the political resurrection of communist politicians in response to the shock of buccaneer capitalism in Eastern Europe...
...Like Bill Clinton, he feels the workers' pain and thinks government should do more to assuage it, but he cannot bring himself to challenge accepted political wisdom...
...In discussing the arguments over the effect of trade on wage inequality, he tells us: "Economics is notoriously bad at quantifying forces that most people believe are quite important...
...In lay terms, this means that a worker is now competing with a much larger labor supply...
...Rodrik writes, "Labor should advocate a global economy that carries a more humane face," but he is silent about the fiercely organized efforts of multinational business and finance to prevent humane policies from even being considered by the International Monetary Fund, the World Bank, the World Trade Organization, and other rule setters for the global marketplace...
...Yet there is one more bonus...
...Rodrik, who in all else insists on evidence, bases his entire book on the unproven assumption that the benefits of free trade are so enormous that they dwarf the costs...
...We are dealing here with faith...
...Despite the perception of a backlash against the welfare state, says Rodrik, the principles behind it remain popular...
...But the costs keep rising and the benefits never seem to trickle down below the top of the pyramid of income and wealth...
...Inasmuch as we all want technological progress, the mainstream consensus concludes that rising inequality is inevitable...
...The second is his unintentional illustration of the weakness of the foundation upon which the neoliberal argument rests...
...Rodrik's intellectual honesty leads him to write a brief pas120 • DISSENT Books sage that exposes the cracked foundation upon which the entire neoliberal trade argument is built...
...Rodrik shows that globalization pressures are downsizing the domestic public sector and shifting the tax burden from capital to labor...
...Search the serious literature of economics for empirical evidence that trade among industrial nations brings appreciable gains, and one cannot find it...
...Increased international competition, he writes, translates into greater "elasticity" of the domestic demand for labor...
...One is Rodrik's accessible and often brilliant analysis of the way international markets can destabilize national societies...
...The neoliberal enterprise— deregulation, privatization, and the ripping up of the social safety net—expands relentlessly around the globe...
...He lectures labor and government to be more responsible, but has nothing to say to multinational corporate business...
...He concedes another of the dissenters' points: that economic models can identify only a small fraction of the totality of forces that have led to rising inequality...
...For those who want to know what they might be worried about, Rodrik's book is a good place to start...
...It's not surprising that the more perceptive of our economists are getting worried...
...For all intents and purposes, it was zero...
...Unfortunately, Rodrik's policy recommendations do not match his analysis...
...This suggests a point of view that is, to put it mildly, out of touch with the realities of the global political economy...
...The second area of tension between expanding trade and social stability is the way in which trade undermines national institutions aimed at protecting people from the harshness of the market...
...Rodrik thinks these events show that the private marketplace is not distributing benefits evenly enough to keep the social peace—and to prevent the rise of protectionism...
...The fear of protectionism drives the author and pervades the book...
...And who more than economists understands that when a bull market looks like it may be topping out, it is time to hedge your bets...
...Yet most economists do believe that expanding trade was very important to this progress...
...L=7 FALL • 1997.121...
...But he is a believer nonetheless...
...A few hours invested in this small book reaps returns on two levels...
...Rodrik's politics are at best naive...
...But this does not get at the core distributional problem of the shift of income and wealth from labor to capital...
Vol. 44 • September 1997 • No. 4
