Dani Rodrik: How can we fix the problems in the world economy?

Dani Rodrik Says More…

Project Syndicate: «What some decry as protectionism and mercantilism,» you wrote last month, «is really a rebalancing toward addressing important national issues.» As you explain in your 2017 book, Straight Talk on Trade: Ideas for a Sane World Economy, the blind promotion of unbridled globalization was never good economics. What forgotten or neglected principles has mainstream economics re-embraced (or reconsidered) recently, and are there major ones that economists are still ignoring?

Dani Rodrik: The main thing we forgot, funnily enough, was that economics is the science of trade-offs. Squeezing ever-more gains from ever-deeper trade and financial integration came at a cost: many communities and workers saw their economic well-being deteriorate, and vital global public goods, such as the climate and public health, were neglected. If one raised objections, the overwhelming response was, «We can have it all: let trade be free, and we will deal with any issue it creates using targeted remedies, such as compensation and carbon taxes.» This brings us to the second forgotten economic principle: the principle of second-best. The world is necessarily second-best, and our policy objectives are not as neatly separable as first-best economists assumed.

PS: You have also noted that US President Joe Biden’s «industrial policies, green subsidies, and made-in-America provisions» are a «source of irritation» – and, indeed, «worry« – for the developing world. Given this new global context, what should developing countries be doing to make progress toward an economic model that is more reliant on «service industries and small and medium-size enterprises, rather than on industrial exports»?

DR: The kind of development model you mention is not one with which we have much experience. So, this is a very tough question. That said, I really do not see much alternative to finding the answer.

The central challenge for developing countries is determining how to get their people into more productive occupations. For the longest time, the prescription was to promote industrialization. But manufacturing – especially the kind that is internationally competitive and plugged into global value chains – no longer absorbs much labor. So, we need to support growth in smaller and medium-size enterprises, mostly in services, by providing them with a set of public inputs, such as management training, access to technology, specialized skills, better regulatory structures, and access to credit. Success will require a new policy mindset and a lot of experimentation with different approaches.

PS: You have warned that the narrative underpinning a new «healthier» form of globalization and the industrial and other policies it entails must not be «hijacked» by leading powers’ national-security establishments. Mismanagement of the US-China rivalry, in particular, threatens to make the global economy «inhospitable.» Which current and potential US and Chinese policies pose the biggest risks on this front, and how can economists persuade policymakers to adopt a «productivist,» rather than a «hyper-realist,» paradigm?

DR: I think the greatest risk on the Chinese side would be an invasion of Taiwan. The status quo on this issue has worked well, and I hope both China and the United States will preserve it.

On the American side, I like National Security Adviser Jake Sullivan’s «small yard, high fence» policy, which limits Chinese access to a limited range of technologies that are critical to national security. The danger is that the yard will expand over time, and commercial relations with China will turn into a zero-sum game.

On the second question – how economists can push policymakers to engage in productivist policies – I am not sure, frankly, that economists have this kind of influence. I suspect that policymakers and policy entrepreneurs will lead the way, and economists will follow.

By the Way…

PS: Policy prescriptions for managing the negative effects of globalization have often emphasized redistribution, together with interventions like education and skills upgrading. But you have argued that redistribution is inadequate to offset the inequality-enhancing effects of hyper-globalization. Why is that, and how should we think about the role of redistribution in making globalization fit for purpose?

DR: There are two aspects to this. First, while redistribution and compensation may be more desirable on traditional economic grounds, they don’t work well in practice. There are a few reasons for this. For one thing, these policies create their own inefficiencies. For another, the net gains from additional trade liberalization are often not large enough to support meaningful real-world redistribution. There is also a credibility problem: we would like to promise the losers compensation, but they have good reason to doubt that it will ever arrive. In the US, for example, trade-adjustment assistance programs have often been underfinanced.

The second aspect is that when people lose their jobs, they lose more than just their income, and the damage to their communities and social lives cannot be fixed with a check. Any meaningful adjustment to economic change requires the creation of good jobs in other sectors, and this is not addressed by redistribution.

PS: «As trade agreements become less about tariffs and nontariff barriers at the border and more about domestic rules and regulations,» you have written, they become more likely to «produce purely redistributive outcomes.» What qualifies as a well-designed trade agreement? How can such agreements «result in the global upgrading of regulations and standards,» such as for labor and the environment?

DR: I am more a fan of the General Agreement on Tariffs and Trade model, with tariff liberalization among major trading partners and the benefits extended to poorer countries through «most-favored nation» treatment. Many arrangements concerning intellectual property rights or services, designed under the auspices of the World Trade Organization or embodied in regional free-trade agreements, are overreach.

I do not think that trade agreements per se can be used to achieve a global upgrading of standards in non-trade areas, such as labor or the environment. Using trade as a wedge to get governments to clean up the environment and treat their workers better is ineffective and creates all kinds of distortions. If governments are serious about protecting labor and the environment, they should strike real deals in their proper fora – say, giving the International Labour Organisation teeth or making binding environmental commitments.

PS: The International Economic Association, of which you are president, has embarked on a multiyear, global project to enhance the role of women in the economics profession. What steps is the IEA taking to advance this goal? Do you view greater diversity as a remedy to some of the profession’s aforementioned failings?

DR: One of the ways we can make the economics profession better – by which I mean not only more inclusive, but also better equipped to address the real problems of the world economy – is to make sure that it reflects the voices of a diverse set of scholars. At present, women economists from developing countries face high barriers, owing not only to local practices and norms, but also to lack of access to networks in centers of economics research. The IEA’s Women in Leadership in Economics Initiative (IEA-WE) is a relatively small but still meaningful (I hope) step toward addressing this problem.

We are doing several things to drive progress. We are undertaking both quantitative and qualitative research on the prospects for women economists in several developing economies. We are supporting research on specific interventions that can help women overcome barriers in the profession. And we are trying to amplify women’s voices in the global public sphere through partnerships with global platforms, including Project Syndicate. I am very proud of this initiative, which is led by Ashwini Deshpande. Raquel Fernández, Fiona Tregenna, María Inés Berniell, and I serve as team members.  

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By a PS Contributor

I wrote Straight Talk on Trade as a punchy, readable exposition of my views on what we are doing right and wrong, and how we can fix the problems in the world economy. The book came out before the unraveling of hyper-globalization, so it presages many of the debates we are having today about how to move forward. In particular, I present an argument for rebalancing the needs of global markets and those of national economies in a way that is more sensitive to the requirements of sustainable development and economic inclusion. I also take a few swipes at the economics profession for its often-doctrinaire position on the role of markets and government regulation. Economists, I argue, should take more seriously a key insight of their own models: understanding context – making the right assumptions about the underlying constraints and structure – is key to good economics and policy guidance.

Copyright: Project Syndicate, 2023. www.project-syndicate.org

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