Envisioning a Reborn Capitalism

The present global economic crisis has shaken capitalism down to its roots. What will, or should, replace it? Dani Rodrik, professor of political economy at Harvard’s school of government, dealt with that question on June 16 in a public lecture at the London School of Economics.

Rodrik warned against making two opposite mistakes in reacting to the crisis: returning to the protectionism of the 1930s (unlikely, unless the U.S. succumbs to even deeper recession) or making “an ambitious effort to take economic globalization to the next level.”

But neither approach would address what Rodrik rightly considers the fundamental problem of the world economy: “the imbalance between the reach of markets (global) and the scope of their governance (mostly national).”

For a Moderate, Moderated Globalization

The scenario that Rodrik advocates is “an intermediate level of globalization.” Its key element: allowing countries to retain much greater domestic “policy space” when domestic requirements conflict with the requirements of international integration. (In other words, a serious need of a country’s own citizenry should trump WTO rules.)

Rodrik’s intermediate level of globalization would not be “a retreat from globalization per se” but a retreat from the gung-ho globalization of the post-1990 years. Unfettered financial globalization and free capital mobility would lose their power as driving forces under his vision of Capitalism 3.0, the assigned title of his London talk.

A major reality that Rodrik recognizes is that “democratic governance and political communities are organized within nation states, and are likely to remain so in the immediate future.” So it is still up to nation-states to act in concert toward Capitalism 3.0 under "guidelines" such as the following:

There is no “one way” of globalization: institutional designs that underpin market economies will differ according to domestic preferences and needs.

Non-democratic countries may be subject to more restrictive global trade/investment rules “since it cannot be presumed that their choices reflect the needs of their citizenry.”

“Like-minded” nations would be able to “deep integrate” (pursue a high degree of free trade and other mutual economic arrangements).

Where deep integration is not feasible or desirable, the countries would rely on “traffic rules” to manage the interface among the various national institutional arrangements.

It is in his “traffic rules” that Rodrik offers some details on putting the “guidelines,” or general principles, into specific rules. What might such traffic rules look like? In the Power Point presentation of his talk, he offers two sets of traffic rules – “illustrations,” not blueprints.

-- Regarding WTO trade rules, for example, he proposes a special “development box” for developing countries to exempt them from some currently prohibited practices that don’t fit their situation.

-- Among the traffic rules for finance, he proposes recognition of the right of governments to interfere in cross-border financial flows that undermine a country’s own regulations.

A video of Rodrik's presentation can be accessed through the June 18 posting on his Weblog at http://rodrik.typepad.com.

Rodrik’s latest book is "One Economics, Many Recipes: Globalization, Institutions, and Economic Growth." His writings appear regularly in the world press through an international press service called Project Syndicate.

The Vatican is expected to release a new document (called an encyclical) by Pope Benedict XVI late in June. Once scheduled to be released in September last year, the encyclical’s publication was delayed to take into account the economic crisis. Judging by previews given orally and in writings by the Pope, its analysis of globalization will be remarkably similar to Rodrik’s.

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