What do you think is the crisis of globalisation and how did it come about?
The crisis is the result of a lot of people not being particularly happy about the way that globalisation has gone. I think it’s rooted in the highly asymmetric effects that globalisation has had in societies around the world – particularly the advanced democracies, which have seen their underlying social contracts dissolved.
This is the result not just of globalisation but globalisation is an important reason behind changes, really, since the 1980s. And the asymmetry has driven both economic inequality and, also, greater social distance. And I emphasise both the economic and social aspects of this phenomenon: that greater separation from groups that see themselves as beneficiaries of globalisation because their networks are global.
They’re mobile. They have the resources and the skills to take advantage of global markets. And there are other groups which view themselves as much more tied in with their local communities, much more dependent on the local economy and without the skills and networks and resources to take advantage of global economy.
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#32 Dani Rodrik: What is the Crisis of Globalisation
And I think this shows up in many places, particularly where social insurance is weak, in greater inequality between the winners and the losers. But, even when it doesn’t show up as greater inequality in economic terms, it almost, always, shows up as greater social distance between these two groups in terms of divergence in values, norms.
Divergence in terms of, sort of, the cognitive maps of these two groups in terms of how they explain the world to themselves and what they think of the other group.
And where do you think, especially, that social distance comes from? I mean does it maybe also result from the upward social mobility of the previous generation? That you have sort of a new mixture of these social strata that now seem to struggle to understand each other?
No, it is rooted both in material structural factors that we have differences in levels of wealth and education and skills across the different strata and it’s also rooted in the development of a new kind of narrative about how the world works.
And a new understanding of economics and the relationship between the market and society or the market and the state, which really comes out of the failure of the post-war Keynesian or the perceived failure of the post-war Keynesian intellectual framework, as a result of the crisis of the 1970s, as a perceived crisis of the welfare state.
And what has happened is that the intellectual elite have converged around, a much more market fundamentalist or, if you will, neo-liberal view of the role of markets in society with the difference between the right and the left of this elite, being, essentially limited to whether you want more sweeteners at the margin or fewer, whether you want more transfers and more social insurance or less. But, fundamentally, there’s agreement on a significant role of the market and reduction in the role of the government and social entitlements in general.
And, do you also see a political dimension to this crisis of globalisation? I think it was Mark Blyth who said that, if a political economy operates in the way that, at least, at a relative level, large parts of society feel disadvantaged at some point, then it’s not really surprising, it doesn’t take a genius to predict some sort of political crisis as well.
Politics is both at the root of the crisis in some sense, but also it’s affected by these developments and the deepening of these economic and social cleavages. It’s at the root of this, of course, to the extent that these structural trends and the kind of ideological transformation that I’ve just described induced political elites to engage in a set of new global arrangements.
So, we have the kind of globalisation model we have followed since the 1990s that has been a very, very different model than the pre-1990 model. I think the concrete expressions of that are the formation of the World Trade Organisation, which was a much more ambitious undertaking, reaching much more behind the border in terms of domestic regulations and domestic measures on everything from intellectual property to subsidies and investment measures.
And, on the one side, the other side of this equation, the deepening of financial globalisation, for which, I think, again, the 1990s are a kind of a watershed when financial globalisation or the opening up of capital flows became the norm, rather than the exception.
And, I think, both -– the new WTO model of trade and the financial globalisation model of finance – were very sharp departures that didn’t fall on our laps from the sky. It was, actually, political decisions, i.e. by governments of the centre right or the centre left, in fact, often it was the centre left, to rewrite tools or deepen globalisation in a particular direction.
And I think many of the consequences of these in terms of the deepening of the economic and social cleavages were, of course, a result of this new model of globalisation. And then, of course, there is always a political response to these divisions.
So, I think the kind of populism we’re seeing together today is to an important extent driven by these cleavages and the distrust and the distance from the elites that have been created and the inability of the centrist, mainstream political parties, which are deeply implicated in this process, to really provide an adequate response and, therefore, opening up of the political space for mostly parties on the far right or nativist groups that exploit some of this populist backlash.
And interestingly, in your discussion, especially, about this populist backlash, you often hear that in addition to some of the structural and socio-economic factors that you mentioned, there is a cultural dimension to the backlash taking place. Do you see a cultural backlash towards globalisation?
The extent to which the cultural intermingling has gone too far in the view of many people, even amongst those who might not be economically disadvantaged by it?
There are always latent group differences. And these can be expressed more or less depending on the context and what is being rendered salient. My view is that the underlying shocks of the last two or three decades, in other words, what has made the difference, has been mostly of an economic nature and rooted in economic anxieties and in economic inequality. And the accompanying differences in the social status and perceived social status of different groups, vis-a-vis the elites, vis-a-vis the world economy in general.
But then in the political sphere these anxieties and these divergences can be expressed in a number of different ways. And I think what political institutions and political systems do is, essentially, provide a supply of political entrepreneurs and groups that produce various framings, various explanations of what the source of the problem is and, therefore, what the remedy is going to be.
I think what is striking in recent years and the one thing that I had not really foreseen is how successful the right has been, how successful the right-wing populists have been in terms of being able to provide a cultural framing, a cultural narrative, an ethno-nationalist narrative to provide an explanation for what is going on.
So, if you’re suffering, it’s because the rules of the game have favoured disproportionately, you know, minorities or immigrants and your problems have not been taken care of. So, it’s a way of framing the problems in a cultural or nativist kind of a way. One can also frame these things in terms of a more traditional leftist social class that the problem really lies with the rules that large corporations, financial institutions and the wealthy have imposed.
And, therefore, the remedy is not in ethno-nationalism and kicking the foreigners out. The remedy is simply pursuing more inclusive policies. So, that emphasises a very different kind of struggle, a very different policy agenda. There are some left-wing populists around, but I think mostly what gets our attention are the right-wing nativists.
And to get back to the question you asked, I mean, clearly there is a very strong cultural element in what we’re seeing but I don’t see that cultural element as the deep cause here. Not to under-emphasise the importance of racism in the United States or anti-immigrant sentiment in Europe. But I think these are always there somewhere below the surface and we cannot explain a change with a constant.
And I think what has changed much more visibly is the economic context.
Quite interestingly, these developments have been the result of political decisions taken in the 1990s or some of them earlier, as you mentioned. Many people seem to perceive that this has unleashed a beast that is now out of control. The idea that politics is no longer in control and cannot effect a positive change or change in any shape or form is very damaging, because that seems to strengthen tendencies to go for autocratic leaders be it in the United States or elsewhere.
How do you see these political levers? Are they still there? Before we get to the sort of policies that would be conducive to shaping globalisation going forward, do you still think that politics, in general, still has the power to affect that kind of change?
Oh, very much so. I think it’s a myth that technological change, improved communication and all that have undercut the power of the nation state or the ability of politicians to do anything to such an extent that, you know, we are really powerless against these trends.
I think this was, basically, the line that, more or less, the centre left took from the 1990s onwards. This was, sort of, the line of Tony Blair, that globalisation is upon us and the best that we can do is just adjust and anybody who is saying the winds of change can be resisted doesn’t know what they’re talking about.
I think this is completely wrong. I mean I think, as I was saying before, these rules of globalisation are heavily dependent on the choices that elites made. Financial globalisation runs on a financial system that’s underpinned by regulations and legal arrangements that are, for the most part, maintained by the nation state.
When things go wrong in finance, the first thing that happens is banks go, you know, to their governments for help and without those governments, for example, in the last financial crisis, the effects would have been many, many times worse. And, of course, the rules of globalisation and the particular direction that we have gone in globalisation, privileging pharmaceutical companies or multi-national corporations, let’s say over labour or consumer groups, is a very deliberate choice.
And this is not something that cannot be altered or corrected or rebalanced. I think there has been a political interest in spreading this myth of powerlessness. Because often, of course, businesses want to tell governments that, “Look, you can’t do anything. You have to reduce regulations and our taxes, because we’re competing in the global economy and we have to compete with low taxes and the regulations elsewhere. And otherwise we’ll go.”
And, oddly enough, I think, many governments, as I was saying, including centre left governments, have hidden behind globalisation, basically, saying: “Look, we have no choice. We have to do this.” And I think the language around globalisation has in some ways has magnified the backlash against it over time, because it wasn’t just the right who kept saying: “Look, we need to reduce taxes. We need to reduce regulation so that we can compete in the global economy.”
All the things that the left wanted to say were that they were being motivated by the needs of globalisation too. So, the left was saying, “We need to invest in infrastructure. We need to invest in education, because that’s what we need to do to compete in the global economy.” It seemed whether you took the right variant or the left variant, it seemed that globalisation was this thing that was driving what is it that we have to do, as opposed to globalisation, in principle, being a means to what is it that we want to do.
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So, it’s not an end. And because it was taken as this thing that cannot be changed and that to which we’re all subject, essentially, we’ve aggravated in ordinary people’s minds the pressures or the ills that globalisation brings. And we’ve completely underestimated the degree to which it still is under our own control.
I couldn’t agree more with that. I think the then German chancellor, Gerhard Schröder put it all in that one sentence, when he said: “Either we’re reforming or we’re being reformed.” So, it’s just that whole notion that you have to adjust domestically to whatever is out there, that is extraneously created and you can’t do anything about it.
So, where do you see these political levers? Are they still at a nation state level? Are they on a supranational level? Or is it necessarily a combination of both?
No, I think it’s mostly in the nation state. Even in those areas where the pressures of globalisation and international mobile capital and finance are very strong, such as the race to the bottom in corporate taxation, for example: even there, the nation state has a significant amount of rule. For example, you don’t have to negotiate with other countries to change your tax regime and put it on a basis of sales in a particular jurisdiction.
So, you can tax, for example, corporations in proportion to their sales that they undertake in your own jurisdiction. And, therefore, the location of the corporation in its subsidiaries is no longer an issue. And so, even where the pressures from globalisation are fairly strong and where we do see the downward race to the bottom in terms of reducing corporate taxes, the fact is that we are unable to tax corporations largely as a deliberate choice, rather than an inability or a lack of imagination on our part.
But, of course, in many other areas, I think, it’s even more the case. So, I think, the United States has still significant room for improving its social insurance policies. And nothing in globalisation prevents the United States from having health insurance for everybody, for having health insurance that is completely portable, for having active labour market policies or unemployment insurances or a minimum wage that pays a decent living wage for everybody. Similarly, a lot of other things that would increase jobs and living standards such as a significant ramping up of spending on infrastructure. And the United States could expand on a lot of things that it already does under the radar screen, in terms of industrial policies and restructuring policies and there’s a lot more that could be done with those.
And certainly, there’s a lot more room for progressivity in income taxes and in introducing wealth taxes before you get into the problem of skilled and wealthy people running away to the Cayman Islands. So, most of the agenda really has to be at the national level and I do think that there are things to fix in our trade agreements and the WTO as well. But I think, in some sense, that’s not the first priority.
Okay. And if you put yourself in the shoes of policymakers now. If you were now tasked with reforming globalisation and putting it on a more sustainable footing, what would be your agenda? What would be your top priorities?
With respect to globalisation, per se, I think, the way that I see the main line of reform, I would express it as, essentially, a kind of rebalancing. I don’t like posing the problem in terms of a reversal in globalisation. So, I don’t think the issue has really been slowing down or reversing or going back on globalisation.
Once you put the debate in terms of pro- versus anti-globalisation, I think, you miss where the real issues are. The problem with our existing model isn’t that we have too much globalisation, the problem is that we have too much globalisation of the kind that particular interest groups have been successful in getting, while other interests have been left out.
So, we have a globalisation that disproportionately privileges multinational corporations, pharmaceutical companies, financial institutions, high-tech companies. And labour and environmental groups and many consumer groups just feel left out. So, I think, the issue is really rebalancing. What does that mean?
It means paying a lot more attention to the kinds of issues that labour cares about and paying a little bit less attention to the issues that capital cares about. So, I think we should take, for example, the ISDS (investor-state dispute settlement) investor rights in trade agreements. Frankly, it’s an abomination. It should not be there. And I think it should be taken out.
I think we have gone way too far in terms of intellectual property rights protectionism and this is one of the areas where corporations lobby the most when they’re supporting trade agreements. Because intellectual property rights protection is one of the main benefits. But it is not properly a trade arena.
The thing we ought to be discussing in trade, essentially, are redistribution from lower income countries through to rich countries. And, I think, so, trade agreements are not the right domain for discussing that. I think we should have a lot less behind the border harmonisation.
The WTO was the transition to a new model where we said: “We’re going to try to target all transactions brought about through international trade investment even if those are regulations behind the border.” And I think once you’re starting to go into regulations behind the border, you’re really reaching into deeply political territory.
And one company’s trade restriction is another social group’s protection of jobs or health and safety standards or embodiment of their norms with respect to how we should be treating the environment, for example. And so, it’s very dangerous for trade regime officials to start thinking about regulatory diversity in the world economy as a barrier to trade.
Everything is a non-tariff trade barrier, by definition?
That’s right. It becomes a non-tariff barrier. So, I think, those are all areas where I think we should be doing a lot less. There are areas where globalisation or global governance hasn’t gone far enough. And, I think, there are areas where we should do a lot more: corporate tax harmonisation and much greater transparency in global banking is one such area.
So, international coordination of corporate tax policies and much greater exchange of bank and other related information for tax purposes, that’s an area where there are still big gains from improving global rules. And another area is probably the area where the greatest gains from globalisation are to be had, that we have not explored sufficiently, is a global regime for temporary labour mobility.
In goods and capital, global markets are already fairly free. So, we’re really trying to eke out very tiny efficiency gains from further reductions in barriers like border barriers. Whereas in labour mobility, at first the barriers are huge and thus the economic gains are extremely large. That’s also an area where there are potential concerns about what the distribution implications would be from having workers from low-income countries given greater access to labour markets in the advanced countries.
But somewhat paradoxically, the economics of international labour mobility tells us that, in fact, if you compare the overall economic gains to the redistributive effects, they are much, much larger in the area of labour mobility than when we’re negotiating about barriers to trade in goods or in financial services or capital.
What that means is that we, basically, have much greater ability to redistribute those gains because the net gains, the aggregates are so large in relation to the potential redistribution that would take place. So, our possibility for doing what is huge, superior trade reforms, which is to say, you reduce barriers without leaving anybody, necessarily, worse off by undertaking the compensations that are required: we have much greater, in principle, ability or potential to do that in labour markets than we do in our traditional negotiating domains.
But that, obviously, runs the danger of running up against the anti-immigrant sentiments that are sweeping across the political landscape?
The deep problem there is that we’ve never been able to separate in people’s minds economic mobility from immigration. And, of course, there’s always a concern that a temporary work visa programme, allowing people to work for three to five years, say, in a host economy, necessarily will turn into an expanded immigration programme.
But I think we need to separate out different kinds of programmes and different dimensions of people crossing borders. We need to separate the issue of refugees, which is, fundamentally, a human rights issue, from the issue of migration, which is, fundamentally, a question about how much diversity do we want?
How large a population do we want? And what kind of policy are we going to follow in terms of whether we want more family reunification? Do we want more skilled immigrants? That’s really, sort of, very much an economic, social political discussio, that every country has to sort out for itself.
Third, we just have an issue of worker mobility, which is, basically, people coming to work under the labour standards of the host country, but with no claims to eventual citizenship. And, I think, you know, the gains from that last domain of labour market economics (labour mobility) are so large that it would really be a pity if we kept that domain hostage to all the problems that we encounter when we talk about immigration policies.
And, I think, that’s an area where the left has to be able to get over its hang up that the human rights issues are so large that any temporary work visa programme that did not, at some level, provide a path to citizenship would be a fundamental violation of human rights.
And, I think, applying that standard really backfires, because we’re preventing a lot of people in the developing countries from substantially increasing their economic livelihoods for themselves and for their families and for their countries back home, by applying a standard that is not going to be met in practice anyhow.
And could that, also, be a two-way benefit? So, obviously, if these migrants can return after three to five years to their home countries, they will probably transfer quite significant skills and would be able to apply those in their home economies as well. So, could there be a developmental aspect?
Yes, I’ve written up a proposal along these lines in several places but encouraging return would be a very big part of this proposal. Now, of course, people say: “Well, it’s very difficult to do that.” It’s true. But I think there are a combination of incentives – both carrots and sticks – that would be worth experimenting with. And the incentives ought to apply to the economic migrants themselves through an incentive to return.
And you can do that by, essentially, for example, just having enforced saving programmes where part of their incomes are held in escrow accounts and are not returned until the migrant goes back home. But there also have to be carrots and sticks for the home governments of the migrants.
One idea I proposed is that if each home country, each sending country, has a given quota and that the renewal of the quota would be conditional or subject to a large enough proportion of each wave of migrants returning to their home country. Now, for a home or a sending government, that gives a very strong incentive to find ways in which to attract their economic migrants back home because otherwise they would lose out.
So, they would be able to send fewer people in the next wave, in the next round. And, presumably, lots of people are waiting in a queue and that would not be a very popular thing. So, again, if you set the right incentives, I can easily see how sending governments would be competing to bring their migrants back home.
And it would be nice for a change to see governments competing to bring their people back home as opposed to competing for tax and subsidiaries for foreign investors.
Yes, that could be an, especially, important policy for Europe if you look at the migration coming from Africa driven by economic despair, which is unlikely to go down naturally any time soon.
Yes, this is going to happen whether it happens formally or illegally under the radar screen. And the benefits will go both to the migrants themselves, but also, of course, to the host economies, especially in Europe with demographic change and shrinking labour forces. That’s potentially a very important source of economic gain in the host economy with the right kind of complementary programmes in place.
But, as you say, these pressures are going to be there. And are not going to disappear. And we have a chance to regularise some of these flows. And so, countries that care about their human rights and democracy record can say with a straight face: “Look, we’re going to be tough on illegal migration, on people crossing the borders, illegally, for economic reasons, because we already have this programme that is a formalised programme of temporary work permits.” So, I think, that makes these countries look better.
Okay. Very interesting policy idea, which we will try to popularise here in Europe.
About Dani Rodrik
Dani Rodrik is the Ford Foundation Professor of International Political Economy at the Harvard Kennedy School.
