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W1: The Globalization Paradox (Dani Rodrik)Introduction
Rodrik offers an alternative narrative in this book on globalization:
Markets and governments are complements, not substitutes. If you want more and better
markets, you have to have more (and better) governance.
Capitalism does not come with a unique model. Economic prosperity and stability can be
achieved through different combinations of institutional arrangements in labor markets,
finance, corporate governance, social welfare, and other areas.
Rodrik’s political trilemma: we cannot pursue democracy, national determination, and economic
globalization.
His opinion: Democracy and national determination should trump hyperglobalization. Not the end of
globalization though, this is the paradox: create a thin layer of international rules that leaves
substantial room for maneuver by national governments is a better globalization.
1: Of Markets and States: globalization in history’s mirror
This first chapter is about mercantilism and companies acting as states. Today we think more like
Adam Smith; they believe that economies flourish when markets are left free of state control.
Competition, rather than monopoly, maximizes economic advantage.
The dichotomy between markets and states is false and hides more than it reveals. Market exchange,
and especially long-distance, cannot exist without rules imposed from somewhere; where there is
globalization, there are rules.
What distinguishes mercantilism from later versions of capitalism is that the job fell by and large on
private entities. When private companies could no longer perform those tasks – either because they
became too weak or competition from other nations undercut their rents – the crown had to intervene.
A contemporary economist would say that Hudson’s Bay Company were reducing transaction costs in
international trade to enable a degree of economic globalization. Institutions are social arrangements
designed to reduce such transaction costs. They come in 3 forms:
Long term relationships, build through trust and long term companionship.
Belief systems or ideologies (think about tribes, religious groups etc.). These two work best at
local or small scale – don’t have to travel over large distances.
Third party enforcement by institutions. Think about protection of property rights or courts.
Markets are most developed and most effective in generating wealth when they are backed by
solid governmental institutions. Markets and states are complements, not substitutes.
Cameron concluded that governments had grown the largest in those economies that were the most
exposed to international markets. Why? Rodrik researches this and comes to the social insurance
reason: the welfare state is the flip side of the open economy.
International trade and Finance entail inherently higher transaction costs than domestic exchanges.
, Conclusion paragraph of this chapter: Markets are not self-creating, self-regulating, self-stabilizing or
self-legitimizing. Every well-functioning market economy blends state and market. Hence global
markets are problematic: they can lack the institutional underpinnings of national markets and they fall
between existing institutional boundaries. This dual curse leaves economic globalization fragile and
full of transaction costs, even in the absence of direct restrictions on trade and cross-border finance.
2: The rise and fall of the first great globalization
What made the seventeenth and eighteenth centuries the era of globalization?
New technologies – like canals, steamships etc.
Economic narrative changed as the likes of Adam Smith and Ricardo got some action.
From the 1870’s on, the adoption of the gold standard enabled capital to move internationally
without fear of arbitrary changes in currency values or other financial hiccups.
Two reasons from this book:
Convergence in belief systems among the period’s key economic decision makers.
Imperialism; as a type of third party enforcement with the governments of the advanced
countries as the enforcer.
The lesson: depending on where a country stands in the world economy and how trade policies align
with its social and political cleavages, free trade can be a progressive or a regressive force. Britain was
the industrial powerhouse of the world in the mid-nineteenth century and liberal trade policies favored
manufacturing interest and the middle classes. The US was an industrial laggard with a cost advantage
in slavery-based plantation activities, where liberal trade policies would have benefited repressive,
agrarian interests.
The globalization of the nineteenth century was not based as much on fair trade as is often portrayed.
Policies of empire – formal or informal – clearly promoted trade, but they were based on the naked
exercise of power by the metropolitan countries and hardly presented free trade in the true sense of the
term.
The gold standard: rested on a few rules. Each national currency had its gold parity, which pegged its
value rigidly to gold. E.g. a country with a deficit on its foreign balance of payments would lose gold
to its trade partners, and experience a reduction in its money supply. Under gold standard rules,
governments had no ability to muck around with monetary policy to alter domestic credit conditions,
because domestic money supplies were solely determined by gold and capital flows across national
borders.
The gold standard and financial globalization were made possible, just as with free trade, by a
combination of domestic politics, belief systems, and third-party enforcement. When these forces
weakened, so did international finance. It leaded to the collapse of the gold standard in the 1930s.
The gold standard had come under pressure before, in the 1870s. What was different this time? First
economics; union membership meant that a sustained monetary contraction due to a gold outflow
would result in sustained unemployment. Second politics; they could no longer remain aloof from the
political consequences of economic recession and high unemployment. Third, economics again. Once
financial markets question the credibility of a governments’ commitment to a fixed parity, they
become unstable speculative attacks: investors sell the domestic currency buy foreign currency
move capital out of country. If currency is devalued, they will make tons of money.
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