Dani Rodrik - 1

Dani Rodrik is a superstar economist whose radical interpretation of the trilemma of globalisation has become an important method to understand the imbalance that globalisation has caused in the last three decades. He wrote about it in 2007, just prior to the financial crises of 2008.

Rodrik was in Toronto recently for the Cadario visiting lecture in Public Policy. He spoke on ‘Globalisation’s wrong turn: What’s wrong with globalisation, and can it be fixed?’

According to his thesis, the process of globalisation involves three sociopolitical and economic variables:

The trilemma is a triangle and we have three corners.

Hyper globalisation as a model of the world which is frictionless mobility of capital, goods, and services

National sovereignty – the ability of nation states to administer their own systems

Mass politics and democracy the degree to which governments are accountable to the people through democracy or other means

The claim of the trilemma is that in a political economy, you can have at the most two of those three things and never all three simultaneously, so people must make a choice.

Rodrik says, all the three forms couldn’t achieve an equilibrium on all the three parameters.

The gold standard combined national sovereignty with hyper globalisation while keeping mass politics at bay

The post 1945, Bretton Woods globalisation combined mass politics with national sovereignty keeping hyper globalisation at bay

The post 1990s globalisation contends that who needs national sovereignty at some level, we can have a hyper globalised economy, increased integration of the market economy – goods, services, finances, not so much labour, which is an exception, and we can deal with mass politics by making our global institutions more representative, more accountable. Politics moves beyond the national to encompass the transnational.

This is a radical interpretation of the relationship between democracy and capitalism, a relationship that has often sought to be portrayed by the votaries of capitalism as natural and deeply intertwined. In fact, Rodrik’s as trilemma indicates, at no point in the history of modern capitalism (since the late 19th century) has this relationship been natural. This is analysed in more details in the third part of this blog.

As per Rodrik’s analysis, globalisation has gone through three distinct forms during three eras in the past century or so. These were:

The gold standard – began from the mid-19th century

The Bretton Woods era that began in 1945, and led to the post-World War II economic reconstruction

The hyper globalisation era that began in the 1990s and we have experienced for the last three decades

Rodrik says that while all the three eras espoused globalisation, they were inherently different in their key characteristics.

Free mobility of capital and free trade in goods

Degree to which governments could enforce regulations across international borders – indicating how the governments felt compelled to pursue economic policies

The presence of multilateral governance institutions

The gold standard we had free mobility of capital across the world free trade in good and free mobility of labour. The Bretton Woods era onwards, the free mobility of labour was curtailed and controlled by developed economies.

According to Rodrik, during the Bretton Woods era of globalisation, governments were free to follow economic and social policies unconstrained; they could follow macro economic policies, taxation, regulatory and industrial policies without the fear that these policies would be viewed as barriers to trade.

Rodrik explains that during the gold standard and the Bretton Woods eras, we did not have any mechanism that imposed on governments rules and regulations that ensured good economic behaviour.

Financially open economies had norms internalised by policy makers; you had to pursue a policy of parity to gold, you were always paying your external debts, no matter what, and when if you didn’t do that, you were not punished by international institutions because there was no such thing.

He adds, however, with the onset of the 1990s hyper globalisation model, the rules of the global economy reached behind the borders in ensuring the regulations promoting globalisation.

In this era, we entered a phase where national economic policies were viewed from the perspective whether they hindered or encouraged the integration of the global economy; rather than from the perspective of the domestically articulated economic and social costs.

After providing this background, Rodrik then relates the history of globalisation to the present discontent over its effects. How does this relate to the backlash to globalisation and the reactions to hyper globalisation of the last three decades, he asks and provides the trilemma explanation.

He explains that the three different models of globalisations are the choices we make of the two out of the three options we have. In gold standard where we combined the free flow of finance, capital, goods and even labour, and national sovereignty and all the sovereigns ensured gold standards and there was a limited role for the sovereigns to take care of the aspirations of their people.

In today’s terms there was a narrow space for governments to implement macro economic policies as those policies may be viewed as re-imposing barriers to trade and goods.

If international finance and trade are to be fostered, the sovereigns didn’t have much freedom to look after the needs of the people.

Mass politics including democracy had to be kept at bay; gold standard was fundamentally incompatible with mass politics especially as participatory democracy developed in the West.

Rodrik explains because the gold standard kept people’s aspirations at bay, it was unsustainable when mass politics began to gain ascendency. He says that the gold standard was abandoned in Britain in 1931 was it had been transformed into a much more developed democracy and mass political movements against gold standards left no choice to the government. FDR followed suit soon after. Countries that abandoned the gold standard experienced more rapid economic growth.

The gold standard constricted the policy makers’ freedom to initiative economic measures that would generate employment. The tight monetary policy which was necessitated as it had to abide by the gold standards led to high levels of unemployment in the economy. Abandoning the gold standard led to inflation and an increase the money supply, reduction in interest rates and a control over unemployment, he says.