In an interview with ProMarket, Harvard economist Dani Rodrik explained where globalization went wrong, how trade agreements serve rent-seeking by politically well-connected firms, and why the only solution to the rise of political populism is an economic populism that reimagines the institutions of capitalism.
As populist parties and politicians in Europe keep racking up electoral victories, and the (somewhat overblown) fears of impending trade war whip US media into a frenzy, it is clear that the populist backlash that has roiled Western democracies in the past two years is far from over, as devastated communities and workers that have seen the benefits of globalization pass them by continue their insurrection against business and political elites.
While this populist backlash has shocked many over the past two years, it didn’t shock Dani Rodrik. The widening chasm between the winners and losers of globalization, the damage that globalization wrought upon low-skilled workers in Europe and the United States, the dangers that this social disintegration would inevitably result in a huge political backlash—all were subjects that the Harvard economist explored and predicted in his seminal 1997 book “Has Globalization Gone Too Far?”
To understand where globalization has gone wrong, and how best to counter the rise of populist nativism, we recently interviewed Rodrik, the Ford Foundation Professor of International Political Economy at Harvard’s John F. Kennedy School of Government. In his interview with ProMarket, Rodrik explained why trade agreements often serve rent-seeking by politically well-connected firms, how the “fetishization” of globalization’s benefits helped deepen inequality, and why he believes the only solution to the dangerous rise of today’s political populism is an economic populism that reimagines the institutions of capitalism.
The following interview has been condensed for length and clarity:
Q: In a recent paper, you argue that contrary to the prevailing view among economists, trade agreements are the result of rent-seeking by politically well-connected firms. Can you elaborate?
Trade agreements are political documents. Special interests, lobbyists, industry, and labor groups have always played a critical role in shaping them. I think what has changed is not that trade agreements involve special interests and political horse-trading, but the balance of interests.
The traditional economists’ story about trade agreements is that they tend to restrain or rein in protectionist interests. In this story, trade agreements are political, but essentially are a way of limiting the influence of groups that would close off the economy from the rest of the world. I think economists haven’t sufficiently appreciated that the world and the nature of trade agreements have changed and that the balance of interests, in terms of who shapes these trade agreements, has also changed. I think there is less and less reason to believe that, on balance, trade agreements are pursuing what an economist might consider the gains from trade or appropriate social objectives and are more and more being shaped by the agenda of special interests.
Q: When did this change occur?
I think the watershed event was probably the 1990s. The creation of the World Trade Organization, for me, is the turning point. In the ’50s and ’60s, the world was very heavily protected, economies were insulated from each other, and the struggle then was to push against the prevailing protectionism. By the 1990s, the world economy had already become fairly open, and the WTO marked a fundamental transformation in the nature of trade agreements. They changed from trying to remove barriers at the border—the traditional import tariffs or quotas that economists tend to think about when they talk about trade barriers—and instead began to focus increasingly on behind-the-border rules and regulations, things like investment rules, rules on subsidies and health and safety, intellectual property rights.
These are all areas where the economic benefit of global agreements has to be scrutinized very, very carefully because there is no natural benchmark. It becomes very difficult in these new areas to determine whether more trade agreements and international rules is a good thing or a bad thing.
“By fetishizing globalization and exaggerating its benefits and understating its downsides, we have essentially privileged and prioritized a set of powerful interests. The fact that pharmaceutical companies or foreign investors find it so easy to get what they want is in part because of our existing narratives, or existing ideas, about how the world does or should work.”
Q: A recent report by the United Nations Conference on Trade and Development argued that the hyperglobalization of the past 30 years has led to a sharp increase in market concentration, which in turn led to a proliferation of rent-seeking. Do you agree with the assessment that globalization has increased rent-seeking?
I’m not saying that it has increased rent-seeking. I’m agnostic on that. I think it’s changed the relative power of different groups of rent-seekers and that the terrain over which the rent-seeking is taking place is different. I don’t want to make a blanket statement that we’re in a world where rent-seeking has increased. I think it’s always been there. I think what has happened is a combination of changes in our ideas and changes in the financial power and other powers of different groups, and this combination is reflected in the various parts of our global economy.
I think that by fetishizing globalization and exaggerating its benefits and understating its downsides, we have essentially privileged and prioritized a set of powerful interests. The fact that pharmaceutical companies or foreign investors find it so easy to get what they want is in part because of our existing narratives, or existing ideas, about how the world does or should work.
Q: Who are the rent-seekers empowered by trade agreements?
I’d say there are three groups, when it comes to trade agreements. First, financial institutions, banks; second, multinational institutions; and third, pharmaceutical companies. We see the impacts of these groups in investment rules, financial services agreements, intellectual property rights.
Q: To what degree is the populist nationalist backlash in Western democracies essentially a backlash against globalization?
I think globalization has contributed to tearing societies apart. You can see some of that in terms of greater inequality, but you can also see it in the increase of what one might call “social distance” between different groups in society: those who are globally networked and feel themselves to be part of a cosmopolitan group that don’t recognize or need national borders, who have the assets and the mobility to take advantage of the world economy, and those who think that their fates are tied up with local communities, that don’t have the assets or the resources and networks. It’s a social and cultural cleavage that globalization has deepened by having very asymmetric effects on different groups.
Q: Did this cleavage contribute to the widespread sentiment that financial and political elites are self-interested and not concerned with anyone’s welfare but their own?
Yes, I think that’s effectively what has happened and what globalization has fostered. When corporations weren’t as footloose, they felt that the health of their local communities was important—it was important for them. You needed to have a well-trained workforce and you needed to ensure that your local government invested in public services. But if you think of yourself as an entity that can essentially operate in any part of the world and move wherever the circumstances are more advantageous, naturally you build up a very different kind of sensibility where you don’t feel yourself to be part of the local community, and your connections with local stakeholders are weakened.
These elites will not explicitly tell you, “We don’t care about you anymore.” They’ll tell you, “Look, we can’t afford to care about you because we’re competing in a global economy and therefore we have to make these choices, we have to outsource and we have to move, we have to look for low-tax environments because we can’t afford not do.” They’ll complain that they have no choice.
Q: Has the fact that globalization is often used as an excuse for policies that benefit politically connected groups and multinational firms helped fuel this backlash?
It certainly has been an excuse, to be used as a bargaining tool, and I think it’s been often disingenuous to the extent that these corporations have not valued the services or the importance of local or national governments, except for in moments of crisis. Banks and large corporations think of themselves as being global entities that don’t rely on national governments—except during a financial crisis, when they need their national governments to bail them out.
And then of course we have mainstream political groups that have in many ways contributed to demonizing globalization, because they have a tendency to hide behind globalization. Paradoxically, both the right and the left have justified their programs by saying that’s what needs to be done to compete in the global economy. You have the left saying that we need to invest in infrastructure and education so that we can compete better in a global economy—that was the New Democrat line—and the right saying we need low taxes and lower regulations to compete in the global economy. What do you hear when politicians are telling you this? You just hear that globalization is this monster out there that’s making us do all these things, instead of what I think is a sort of an older tradition of thinking, where the world economy was something to help domestic societies achieve their objectives of prosperity, full employment, inclusion, and equity.
After the 1990s, I think these priorities became reversed and globalization became the end, and countries and societies became the instrument, as opposed to the other way around.
Q: Much of the anti-globalization backlash of the last two years has been xenophobic, racist, authoritarian in nature. What is it about the nature of globalization that led to this kind of response?
I think a lot of it has to do with the fact that the left has been missing in action. Twenty years ago, when I was fretting that globalization would create a backlash, I would have guessed that the main beneficiary of this might have been the left, because it would capitalize on the economic and social grievances that these divisions create. Indeed, when we think about the populisms of the late 19th century—in the US or for that matter Latin America, with its long history of populism—they were by and large not racist and xenophobic, ethno-nationalist populisms, but left-wing populisms that focused on financial elites, on corporate elites, and pushed for social reform and more regulation of the economy.
Today, here and in Europe, we’re seeing much more of a right-wing ethnonationalist backlash. I think it’s partly that the left has been missing in action and that the center-left and the social democrats have essentially been complicit in many of these changes since the 1990s. New Democrats in the US and New Labour in the UK were at the very forefront of this push for hyperglobalization, so they couldn’t easily disassociate themselves from this complicity. I think Hillary Clinton’s ill-fated campaign showed that very well.
There were other shocks that made it easier. For example, immigration made it easy for right-wing nativists to provide a much more nativist, ethnonationalist frame for economic and social grievances to which I think one might have responded very differently.
“Economic populism is a populism that takes aim at the sources of economic inequality and at concentrations of economic power.”
Q: In a recent New York Times piece, you argue that in order to fend off the racist, xenophobic populism that we see on the rise in many advanced economies, what you call “the bad kind of populism,” we need a “good kind of populism.” Is this “good” populism, as the title of your piece suggests, essentially the New Deal?
I think it’s like the New Deal in the sense that it requires significant economic and political reforms that will curb the prevailing abuses of the market capitalism that we have now. But I think its specific details are going to take very different forms. I don’t think that the right way forward is to simply enlarge or refine the welfare state that we have, which is based largely on essentially trying to redistribute through the tax and transfer system what the market produces.
I think the challenge today is actually to reform the production stage and the pre-production stage of the market economy, much more so than simply having more progressive income taxation or improved health and employment benefits.
Certainly in the United States, there’s a lot that still can be done in terms of social insurance, and the US has a lot more to learn about improving safety nets from Europe. But I think it would be a mistake to think that’s the main challenge. The real issues are going to be how to rethink property right systems in a way that’s going to make the fruits of innovation and automation much more inclusive, how to make society feel much more [like] an equity participant in technology, closing the gap between this narrow elite that benefits from it and the broad parts of society that are not. How do we increase and democratize our educational system to ensure that the endowments with which workers come into the market seeking jobs diminish this deep cleavage between the technocratic and professional elite and ordinary workers? How do we regulate digital platform monopolies?
These are reforms in education and property rights, in regulation and antitrust policy, that I think are going to necessarily look very different from the challenge that we confronted during the New Deal.
Q: You differentiate between two kinds of populism—political populism, the kind of autocratic populism we see from the likes of Putin in Russia and Erdoğan in Turkey—and economic populism, which you write is “occasionally necessary” and which you seem to suggest as a potential remedy to our current predicament. What is economic populism, and how is it different from political populism?
I think economic populism is a populism that takes aim at the sources of economic inequality and at concentrations of economic power. Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. All of that would be economic populism that tries to reshape the distribution of economic power and tries to reduce the concentration of economic power but does not try to turn the political system into an authoritarian one, does not necessarily concentrate political power or undermine liberal norms of pluralism and tolerance.
Q: And yet there is a certain overlap between the two, at least in terms of rhetoric. Many far-right populists also attack digital platforms, Wall Street, cronyism. How can we better differentiate between the “good” kind of economic populism, and the “bad” kind of political populism?
I think the similarity is that both economic and political populism have an aversion to agencies of restraint. Just like a political populism doesn’t want anybody to stand in front of the so-called people’s will, an economic populism wants fewer restraints on what can be done.
The difference, which I think in many ways is more important, is that economic populism is trying to redress economic imbalances and is actually doing things that would fundamentally improve the overall performance of an economy, [rather than] doing things to aggrandize or entrench the power of those who are currently in power.
Q: You write that the populist backlash to globalization “should not have been a surprise, least of all to economists.” And yet, most economists did miss it. How did so many economists miss what you suggest is a fairly straightforward lesson from history?
When I say economists should not have missed this, I am suggesting that the very economic theory that we teach in the classroom has very stark implications for inequality and social divisions, and therefore we should have expected these divisions having political consequences.
I think fundamentally, economists were so enamored with the principle of comparative advantage and free trade that they felt that what they needed to do in the public domain was to defend free trade and globalization, even though the specific form that it took diverged very much from what they teach in the classroom. Still, I think they just instinctively sort of felt that they needed to be cheerleaders for this process rather than skeptics. Frankly, I think we didn’t do our job very well because of that.
Q: Many of these developments—namely financial deregulation and globalization—have been tied to a set of policies often referred to as neoliberalism. In a recent piece for the Boston Review, you described much of neoliberalism as ideology masquerading as economic science, and criticized mainstream economics for embracing it. Should economists have been skeptic?
I think in a way, economists were definitely a little bit politically naive. During this whole process, if you asked economists about neoliberalism, I think most of them would have said, “What is neoliberalism? I have no idea what neoliberalism is.” And yet neoliberalism is a real thing. I think economists either didn’t appreciate that they were cheerleading for something that the rest of the world called neoliberalism, or they implicitly made the judgment that on balance this was better than sitting on the sidelines or expressing skepticism, because of their fear that the other side, so-called “protectionist barbarians,” would have the upper hand.
Q: Heaping scorn on neoliberalism, you write, risks “throwing out some of neoliberalism’s useful ideas.” What are those?
I think there is really a big distance between neoliberalism and proper, sound economics. But to the extent that it’s really about ensuring macroeconomic stability, ensuring proper incentives, ensuring proper contract enforcement and property rights, these are very valuable first-order principles that ensure good economic performance. As I argue in that piece, this does not translate into what neoliberalism is usually thought of. But we should make sure we don’t throw the baby out with the bathwater, that we just reject neoliberalism, but not reject the important role that markets have to play and the important role that incentives and macroeconomic stability have.
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