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Tuesday, April 30, 2019

Dani Rodrik - 2

The economist then explains that by the time of the famous 1944 Bretton Woods meeting, the governments of the war-ravaged economies had realised that politics has become sufficiently participatory and labour markets have become sufficiently institutionalised to return to the gold standards.

Instead, it was now time to create space for domestic economic management by explicitly keeping hyper globalisation at bay.  So, it was a model of globalisation that was unambitious in terms of how many frictions could segment the national markets.

What that meant in the terms of international finance was that capital controls the ability of national sovereigns to manage domestic financial systems and segment them from global financial markets by limiting the ease with investors could move their money in and out of the country.

Capital controls had to be an integral part of this post-war economic system to create space for what we call today the Keynesian counter-cyclical macro economic policies. That was his idea that you cannot manage your economy and you cannot ensure full employment if you cannot have autonomy over your monetary and fiscal economic polices, and you needed to keep international finances at bay to integrate of the system, as a permanent feature of the system.

The post-war trade regime developed along similar principles. We have a series of multilateral trade agreements and the evolution of General Agreement on Tariff and Trade (GATT) that were equally light on the degree of hyper globalisation and in particular the GATT regime proscribed regulations on globally.

Pertinently, Rodrik says, the recommendation on tariff stopped at the border, they did not reach behind the border. They dealt with only tariffs, they did not tell the governments how to run their patent regime, how to run their subsidies, what kind of other regulations they should have.

The Bretton Woods globalisation – was explicitly incomplete, with one of its cornerstones as capital controls and therefore limited financial globalisation, the GATT model, which left countries pretty free to do what they wanted. The moment it looked like some of the domestic policies looked compromised by trade flows, it allowed countries to take remedial measures.

Clearly in favour of this mode of globalisation, Rodrik says, the Bretton Woods era globalisation increased rapidly under the GATT regime, and enabled rapid expansion of world trade. World trade and international investment increased under the GATT regime.

If you look at the world trade relative to world GDP, world trade expanded between 1945 and 1990 much more rapid pace since it did since 1990. This form of globalisation encouraged international trade and investments without unduly compromising domestic economic and social structure.

Then, coming to the latest form of globalisation, Rodrik says, the move to the latest revamped model of hyper globalisation in the 1990s changed the priorities. The world economies moved from becoming the means whereby you achieve domestic economic and employment goals, to the role where the domestic economy becomes an instrument to achieve globalisation goal.

The actual rules of the game involved creating the WTO in 1990s and the expansion of the regional trade agreements which mushroomed after the 1990s. This was different from the GATT model.

This model enabled the globalisation to reach beyond the borders, domestic regulations, investment rules, subsidy regimes, even health and safety regulations were being viewed from the perspective of whether they were a barrier to trade or not, and to the extent that they differed and seem to be discriminatory against other countries, they are treated as non-tariff barriers.

This form of hyper globalisation gave rise to agenda setters such as international banks, multinational corporations, and big pharma. There is a presumption that all major global economies are to eventually converge into a global economic model because complete freedom of trade and capital mobility requires convergence of regulations and policies, and globalisation becomes the end rather than the means.

And while nobody is looking at global political federal structure, political scientists through the 1990s and 2000s have commented on a sort of network of regulators, and global communities that are creating accountability that will eventually evolve into a global system of governance that will sustain this hyper globalisation, and simultaneously, national governments would become less of an obstacle.

However, this scenario envisages a limitation on national self determination and raises the question of who is empowered in this process. And who are they accountable to?
In the world economy at large, we never went the whole way to implement the third way because national sovereignty is far more important. Rodrik concludes by emphasizing that the trilemma gives us a choice of which of the two from the three things that we need to take.

“And I am of the view that the sustainable model of globalisation is the one that was developed in Bretton Woods era – not particular policies, but the spirit of that era – because it acknowledges that world economy constitutes countries with different economic and social models and that we have to recreate what we think that a reasonably good world economy can generate.”

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