Globalization is not the problem, it's the solution

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?

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