Scott Sumner  

Globalization is not the problem, it's the solution

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Value-Added and Social Desirab... Archiving, Preservation, and H...

Here's Dani Rodrik:

A Chinese student once described his country's globalization strategy to me. China, he said, opened a window to the world economy, but placed a screen on it. The country got the fresh air it needed -- nearly 700 million people have been lifted from extreme poverty since the early 1980s -- but kept mosquitoes out.

China benefited from the flourishing of trade and investment across national borders. For many, this was the magic of globalization.

But it's not the whole story. Look closely at the economies that converged with richer counterparts -- Japan, South Korea, China -- and you see that each engaged globally in a selective, strategic manner. China pushed exports, but it also placed barriers on imports to protect employment in state enterprises and required foreign investors to transfer know-how to domestic companies.

Other countries that relied on globalization as their growth engine but failed to put in place a domestic strategy became disillusioned. For example, few countries tried as hard as Mexico to integrate with the world economy, through Nafta and liberal trade and financial policies. Yet the country's economic growth in recent decades has been sluggish, even by the modest standards of Latin America.


This is a misleading comparison. Mexico is nothing like East Asia; for instance its educational levels are much lower. Why not compare China, Korea and Japan to East Asian countries that were less protectionist, such as Hong Kong, Taiwan and Singapore? That would make more sense, but then that group of countries are richer than the three cited by Rodrik. (And even the three he cites were not particularly protectionist.)

In fact, economists who have studied East Asia tend to find that protectionist policies actually slowed development. The parts of the Chinese economy that have done best are not the protected SOEs, but rather the more competitive private firms. The busybodies at MITI are now seen as having slowed Japanese growth.

Rodrik also ignores the fact that the protectionist policies that were adopted in Latin American in the 1950s through the 1970s were later regarded as an abject failure. At the time, East Asia was less protectionist, and grew much faster than Latin America. Indeed the stark comparison between "open" East Asia and "closed" Latin America is one thing that led to the neoliberal revolution after 1980. And the more neoliberal parts of Latin America (such as Chile) have tended to do better than the less neoliberal areas.

Given his concern about the slow growth in Mexico, you might expect Rodrik to propose polices that would help Mexico to do better. But no such policy reforms are offered; instead he makes Trump-like arguments such as the following:

For example, imports from countries that are gross violators of labor rights, such as Pakistan or Vietnam, may face restrictions when those imports demonstrably threaten to damage labor standards at home.
I'm not sure what he means by "at home", but I very much doubt whether workers in Germany, the Netherlands and Switzerland (with their massive current account surpluses) are worried about losing their jobs to exploited labor in Pakistan. Nor are workers in (CA deficit) countries such as Australia.

There is a serious intellectual argument that a global labor market hurts a subset of workers in wealthier countries, based on the factor price equalization theorem. But this argument has nothing to do with "gross violations of labor rights". Rather it simply reflects the fact that wages tend to be much lower in very poor countries, and that capital can move more easily than labor. If a protectionist wants to slow the development of Asia with trade barriers to protect a few far richer western workers from Vietnamese exports, they should simply say so. Talk about labor rights violations simply muddies the waters. And hasn't the West already done enough to poor Vietnam? How much more misery do we plan to inflict on those people?

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Some simple principles would reorient us in the right direction. First, there is no single way to prosperity. Countries make their own choices about the institutions that suit them best. Some, like Britain, may tolerate, say, greater inequality and financial instability in return for higher growth and more financial innovation. They will opt for lower taxes on capital and more freewheeling financial systems. Others, like Continental European nations, will go for greater equity and financial conservatism. International firms will complain that differences in rules and regulations raise the costs of doing business across borders, but their claims must be traded off against the benefits of diversity.
That sounds fine, but how is it different from the status quo? There is already a great deal of diversity in places like Europe, with some countries having a much more extensive welfare states than others. Some have minimum wage laws and capital gains taxes, while others do not. And that's within the EU, perhaps the most intrusive international organization on Earth.

One of the most basic ideas in international economics is that policies that reduce productivity, such as environmental controls, do not make a country uncompetitive. Rather the real exchange rate adjusts via either a lower price level or currency devaluation, until the international flow of goods, services and assets is again in equilibrium. Yes, lots of health, safety and environmental regulations might lead to lower wages, but that's exactly as it should be. Voters should be told that there are no free lunches. You don't want GMO foods? Fine, but then you'll have to pay more for food.

I don't like either side of the current trade debate. I don't want to stop trading with countries that have objectionable policies, with the possible exception of those that threaten world peace (say North Korea, and even on that issue I'm rather agnostic.) But I also don't think we should use trade negotiations to force other countries to adopt our regulatory or intellectual property rights rules, as some of the advocates of globalization who work within government want to do. Let each country set its own course, and trade freely with the rest of the world. Anything else is a recipe for conflict.

HT: Tyler Cowen


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COMMENTS (23 to date)
Philo writes:

Excellent post. But I thought this struck a slightly false note: "You don't want GMO foods? Fine, but then you'll have to pay more for food." From the individual's point of view the following would be more accurate: "The political authorities in your country outlaw GMO foods? Then you'll have to pay more for food." This is not "fine."

By the way, why does Dani Rodrik get so much respect?

David R. Henderson writes:

I agree with Philo above. Excellent post, Scott, and so much better than the NYT article you commented on. Also, Philo asks a good question.

Benjamin R Kennedy writes:
One of the most basic ideas in international economics is that policies that reduce productivity, such as environmental controls, do not make a country uncompetitive.

You'll have to unpack this idea. Pennsylvania steel towns are dead while China is willing to pollute their air into oblivion. Now the US is the world's leading importer of steel. You don't thing environmental regulations (or lack of them) have anything to do with making PA steel uncompetitive relative to China?

Tiago writes:

I have always had a hard time understanding the widespread acclaim that Rodrik gets. He seems very rigorous when it comes to criticizing benefits that come from globalization, finding all sorts of flaws in studies that link it to growth. When it comes to his pet policies, however, his rigor seems to vanish and he keeps proposing the things that Latin American countries have been trying for decades without success. His main argument seems to be that we haven't tried it the "right" way, nevermind how we would go about making sure this right way would be actually implemented.
Honest question - what is it that I am missing from his insights?

Taeyoung writes:
Why not compare China, Korea and Japan to East Asian countries that were less protectionist, such as Hong Kong, Taiwan and Singapore? That would make more sense, but then that group of countries are richer than the three cited by Rodrik.

The best comparison there is probably South Korea and Taiwan, both of which were colonies of the Empire of Japan (Taiwan from 1895-1945; Korea effectively from 1905-1945). And, hum. Korea is richer than Taiwan (KR is about $27K per capita and Taiwan is about $22K per capita -- not a huge spread, but not nothing). Meanwhile, Hong Kong and Singapore are both tiny city-states built by the British Empire. And China and Japan are huge states, in their own category.

Frankly, it's more misleading than illuminating to try and draw the inference you suggest from a comparison between two tiny city states + Taiwan, to two megastates + South Korea.

Not a comment on your argument as a whole -- the comparison you drew there just struck an immediate and jarringly false note.

Scott Sumner writes:

Philo, My point was that globalization should not prevent democracies from enacting the laws that they choose to enact. I agree that anti-GMO laws are foolish.

Thanks David.

Benjamin, International trade can lead to certain industries becoming uncompetitive, indeed that's the whole point of trade. But it does not make entire economies uncompetitive, rather you get creative destruction.

Tiago, I'm not sure.

Scott Sumner writes:

Taeyoung, Actually Taiwan is almost 30% richer than South Korea, depending on the source:

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

Yes, Singapore is a city-state, but its per capita GDP (PPP) is also higher than Shanghai, Tokyo and Seoul, so that doesn't really account for the difference.

I concede that the comparison is not perfect, but Rodrik's comparison with Mexico is just silly---that was my point.

Jon Murphy writes:

Great post. It makes me wonder how much wealthier China, Korea, et al could be if they didn't have the "screen" on their window.

Benjamin R Kennedy writes:
Benjamin, International trade can lead to certain industries becoming uncompetitive, indeed that's the whole point of trade. But it does not make entire economies uncompetitive, rather you get creative destruction.

Creative destruction encompasses the notion of doings things in a more innovative or efficient way. I don't think China's willingness to pollute its air an an example of this

Jose Romeu Robazzi writes:

In Brazil, our previous government "listened" to Rodrik's ideas, either directly or indirectly, or from a common source, it does not matter, we know where those ideas took us ...

bill writes:

Certain regulations are a type of consumption. An example would be banning lead from gasoline where we may prefer to have less lead in our environment than having an extra $x to spend.

Jon Murphy writes:

@bill

Certain regulations are a type of consumption. An example would be banning lead from gasoline where we may prefer to have less lead in our environment than having an extra $x to spend.

This doesn't make sense to me. Economically speaking, if the value derived from the unleaded gasoline were worth more than the saved dollars, then the market would have naturally produced such an outcome and no regulation would be necessary. The fact that regulation was necessary suggests that there was no preference for less lead in gasoline over the extra dollars. Therefore, the regulation reduced consumption and value, not created it.

Of course, it is possible that the preference was there, but then that would mean oil companies are not actually profit-seeking enterprises.

Lorenzo from Oz writes:

I am sceptical about how much angst there is about free trade. Brits, for example, seem pretty keen on free trade with Europe, if this poll is any indication.

Lorenzo from Oz writes:

Globalisation in terms of goods and services is likely to continue on the upswing for a while, as countries continue to seek to take advantage of falling communication and transport costs.

But those costs may not fall all that much further, and the combination of AI and 3D printing may reverse the direction of technological pressure (i.e. for more localisation of production rather than less).

Globalisation in other senses, however, would continue. For instance, AI and 3D printing are likely to make IP issues more salient, rather than less.

Lorenzo from Oz writes:

Immigration is a whole different thing; and it depends on which immigrants. A recent poll found about half of Australians are "deplorables" (i.e. they want to ban Muslim migration).

Lorenzo from Oz writes:

Americans poll responses differentiate between migrants too: Americans are apparently generally strongly positive about Asian and European migrants, fairly neutral about African migrants and generally not keen on Latin American and Middle Eastern migrants.

bill writes:

@ Jon Murphhy

externalities.
It was difficult for people ingesting and breathing in the lead to make direct payments to all the consumers of leaded gas.

Jon Murphy writes:

@Bill-

Externalities are there, but my point remains. If the benefits were there and people preferred them over that of alternative uses by the money saved (which is the point you originally made), then there would have been incentives for profit-seeking firms to naturally provide unleaded gas, with or without Externalities.

Please forgive any typos or weider punctuation. I'm on my phone:-)

bill writes:

@ Jon Murphy

Perhaps I made my point clumsily. But certain decisions are best made as a group. It wasn't the consumers of leaded gas that wanted unleaded gas. It was the people who had elevated levels of lead in their blood stream. Complicating matters further, in many cases those individuals were children who didn't even know they wanted to not have their lives messed up with lead poisoning. Getting those lead levels down has benefitted them and others. And there was no way for that to have happened via the free market. If you don't like the lead example, how about auto theft? As a society, we attempt to ban it. We pay police, courts and prisons to enforce the ban. We've chosen to not wait for private firms to "sell" the product of auto security. Thankfully, as that would be extortion.

Scott Sumner writes:

Benjamin, It's optimal for China to have more pollution than the US. I happen to think they have too much pollution, even accounting for their low incomes, but that's no reason not to trade with them.

Jose, That's what happens when statist ideas hit the real world.

Bill, I agree.

Lorenzo, Lots of Americans don't even know that their doctor is a Muslim from South Asia. So poll questions are of doubtful value. But I agree that immigration is the most difficult type of globalization.

Lorenzo from Oz writes:

As it happens, my doctor IS a Muslim from South Asia ...

Jon Murphy writes:

@Bill-

I see your point now. The auto example makes much more sense. Thanks!

Benjamin R Kennedy writes:
Benjamin, It's optimal for China to have more pollution than the US. I happen to think they have too much pollution, even accounting for their low incomes, but that's no reason not to trade with them.

There is a moral dimension though. Suppose rather then being willing to pollute, they employed slave labor. I doubt that you would something like "It's optimal to for China to have more slavery, but that no reason not to trade with them".

Granted, pollution is not slavery - but it is a difference with a moral dimension. Taking the moral route often has a cost. But when a country makes a moral choice to not pollute, it doesn't seem fair to me that the cost of that choice is borne by workers in those industries. A tariff that raises consumer prices across the board for all consumers seems a lot more fair to me - that or repeal the environmental regulations that are causing it.

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