The Great Turnaround: Developing Nations Outdoing the Rich Ones

“As rich economies’ prospects dim under their crushing debt burden and political paralysis, the world’s hope for economic dynamism rests with developing nations,” Dani Rodrik of Harvard points out in his weblog, and illustrates with the graph above.

“For the first time ever, developing countries as a group have been growing faster than industrial countries,” he writes. “Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.”

In his July 21 posting, titled "The great divergence, the other way around," Rodrik cautions that the growth in Africa and Latin America is fragile, “much of it making up for lost time, rather than real convergence.” He is more optimistic about the durability of growth in Asia. Read more!

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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WTO Isn't Keeping Up with the World

So once again global trade talks have hit a stone wall. Once again the Washington Post sheds tears over the latest collapse in negotiations. A July 30 Post editorial finds it “particularly dismaying” that the People’s Republic of China cast a veto on the World Trade Organization’s latest proposal to save the so-called Doha Round.

Those ungrateful Chinese! After all, “U.S. supporters of Chinese inclusion in the WTO [including the Post] argued that drawing China into a system of multilateral give-and-take would mute its nationalistic tendencies. Evidently, the Chinese see the matter differently. They, and the world, will be poorer because of it.”

Well, the Chinese are not the only ones who see matters differently from the Post.

“Don’t cry for Doha,” says the title of economist Dani Rodrik’s July 30 Weblog. He writes: “There was not a whole lot at stake to begin with for poor nations as a whole…Panicky statements about dire consequences and protectionist spirals will be more damaging than the actual effects of the collapse of the trade talks.”

Be assured: robust world trade will continue, regardless. Robert Wade, professor at the London School of Economics, explains why. In a letter published in the July 26 Economist weekly, he writes:

“There is almost no chance that the global economy would become less integrated as a result of ‘failure’ [of the Doha talks]. The producers of most goods and services in the major economies are much more integrated into complex cross-border systems than between 1914 and the 1930s, when the world economy did become less integrated.”

The WTO suffers from a much bigger failure than the current one in Geneva. The overall failure is this: the world trading system has simply not kept up with the world. That’s not an opinion; it’s a fact.

One example: today's global system, as patched together in the 20th century, ignores the radical changes in information technology since then and therefore does not outlaw the trade barriers erected by China (and other repressive countries) against the free flow of information.

I've written an account of how this particular failure troubles me personally. My article is published in the August 4 issue of America under the title “Buyer’s Remorse: Spatulas, Yahoo, and the conscience of a consumer.” Click here. It is part of my collection of evidence that the WTO has not kept up with the world as transformed by globalization.


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Hooked on Free Trade Religion

Then there’s the print media’s addiction to the present system of “free trade.” The worst offender of all, in my view, is the New York Times. Liberalization of trade is a sacred component of its liberal faith, promulgated throughout the paper, not only on the editorial pages but in the business section and in the weekly Magazine. Dissenters seldom get any space, not even in the news pages.

Also, facts embarrassing to the policy line get buried or ignored. In a national poll conducted in mid-June, 56 percent of voters surveyed said that NAFTA needs to be renegotiated. Even 49 percent of Republicans agree, according to a June 18 release by an independent polling organization, Rasmussen Reports. The story appeared on Fox News, but not in the New York Times.

On June 8 the New York Times Magazine ran its latest defense of free trade, “This Global Show Must Go On” by Tyler Cowen, professor of economics at George Mason University. Among other things, Cowen criticizes a proposed “’timeout’ from globalization” when the actual proposal is for a timeout in trade negotiations (there already is a de facto timeout, and world trade is actually accelerating, as Cowen acknowledges).

Another economist, Dani Rodrik, has written an economic response to Cowen in an article, “Globalization anxiety as mass hysteria?” on his Weblog. Here’s his first sentence:

“Those who are puzzled by globalization anxiety and attribute it to collective irrationality (see Tyler Cowen’s piece in the NYT) overlook a fundamental aspect of markets – their ‘embeddedness’.”

Read the full text here. Enjoy.

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The Dishonesty of Economists about Trade

Trade policy is likely to grow into a larger issue in the course of the Presidential campaign. A good thing, I used to think. But is it?

A lot depends on how economists succeed in framing the issues as advisors to the candidates and as commentators in the media. Sadly, most economists cannot be trusted to portray the issues honestly.

That’s my view. Dean Baker, an economist who is co-director at the Center for Economic and Policy Research in Washington, D.C., has a similar view. He holds that “economists have been extraordinarily dishonest in their interventions in public debates over trade policy.”

He develops his case at length in an article, “Trade and Inequality: The role of economists,” in the March 15 issue of the Real World Economics Review. Leading his indictment is this charge: economists “have acted to conceal the fact that a substantial group of workers, quite likely the majority of the workforce, can expect to be losers from the recent path of trade liberalization.”

Baker’s analysis of economic theory applied to current trade patterns leads to this conclusion: “The winners are likely to be owners of capital and highly educated workers, with the rest of the populations ending up as losers.” This outcome isn’t accidental, he explains; “it is literally the mechanism through which the economy experiences gains from trade.”

Baker blasts the major media outlets for the “enormous respect” they show for the trade policy ideas of mainstream economists and for the ridicule poured on those who disagree.

As it happens, the March 16 New York Times has an example of that. It features a discourse “Beyond the Noise on Free Trade” by N. Gregory Mankiw, professor of economics at Harvard and onetime advisor to President Bush and to Mitt Romney in his Presidential campaign.

In his first paragraph, Mankiw writes: “No issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the market’s invisible hand, Joe Sixpack sees a threat to his livelihood.”

Unfortunately in his view, the Muggles and Joe Sixpack don’t benefit from economic courses such as his at Harvard, and doesn’t understand that “trade between two countries creates winners and losers, but it leaves both nations with greater overall prosperity.” As a result, the general public is “less likely to take its cue from Adam Smith than from Lou Dobbs.”


For Mankiw, Senators Clinton and Obama have erred in making Nafta the “latest whipping boy of the ant-globalization crowd.” What consoles him is that their “populist rhetoric” will disappear after the election, and like President Bill Clinton, will rely on the advice of economic moderates like Robert E. Rubin, former Treasury Secretary.

Harvard economist Dani Rodrik on March 16 posted a short item on his weblog titled “Why doesn’t the public buy the economists’ advocacy of free trade?” The posting in full:

“Greg Mankiw bemoans the huge gap between the economics profession and the common people on free trade. Unlike him, I tend to think the fault with economists, who have traditionally proselytized free trade rather than communicated what economics really teaches on trade. Dean Baker offers a sensible guide.”

Rodrik’s words, really teaches, link to an earlier (September 22, 2007) posting praising an analytical paper by Robert Driskill, professor of economics at Vanderbilt, who Rodrik says “knows the theory of comparative advantage as well as anyone else.” Here is a quote from that Driskill paper:

“Unfortunately, most economic writing on the welfare implications of trade is not a balanced weighing of the evidence, or a critical evaluation of the pros and cons of arguments, but rather more akin to a zealous prosecutor’s advocacy of a point of view. As such, this writing is designed to persuade rather than to give the reader the information needed to form an educated point of view.”

To a Driskill passage on how poorly supported positions on trade can confuse people “into false positions about what economics really says about the effects of international trade,” Rodrik added the comment: “A pervasive such false belief, for example, is that trade necessarily benefits more people than it hurts.”

That such a false belief is regularly promulgated by the New York Times is bad enough. Far more troubling is that many economists are teaching this falsehood (and others) about trade in the nation’s colleges and universities.



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