In defense of Larry Summers

My good friends Devesh Kapur and Arvind Subramanian (along with Pratap Mehta) have written a piece in the FT which takes Larry Summers to task for having expressed views on reforming globalization with which I am broadly in agreement.  They write:

The liberal economic order of the last several decades was premised on two assumptions. First, that the proliferation of prosperity across countries was a good thing. Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit. Mr Summers now appears to be questioning both assumptions. He has not stated outright that the proliferation of prosperity is undesirable but his ­columns do suggest that globalisation creates competition for America.

I think there was a third element in the liberal economic order of the postwar period, which is the essence of its success.  And that is the idea that international economic arrangements would leave enough room for nation states and governments to strike their own particular domestic economic and social bargains.  This is the compromise of "embedded liberalism," as my colleague John Ruggie has called it.  This compromise lay at the root of the phenomenal success of the Bretton Woods regime, and its piecemeal abandonment is the chief cause of the troubles of globalization today.  I see Summers' argument as a recognition of this fact.   

In effect Kapur et al. have fewer problems with the message than with its bearer:

The problem Mr Summers identifies, the hyper-mobility of capital, was an outcome that he and the US actively promoted. Attracting foreign capital was one of the raisons d’être of the Washington Consensus-based reforms. Developing countries were forced to change their intellectual property laws. At the US Treasury, Mr Summers was a leading proponent of capital account liberalisation by developing countries. Having swallowed those bitter pills of intellectual property protection and capital mobility as a necessary price for a better future, developing countries are now told that those medicines cause problems that need more – in this case protectionist – medication.

But they also worry that Summers has opened the door to protectionism, whereas the remedies to the ills of U.S. workers, they say, are to be found mostly at home (through better social programs and progressive taxation). 

I don't know.  Yes, we need better social programs. But we also need better international rules.  I think it does the cause no good to throw the "protectionist" label around whenever someone expresses doubts about the current rules. For my part, I celebrate the defection of Larry Summers from the camp of globalization's cheerleaders.     

Comments

[Rudi]

Dear Prof Rodrik --
Both pieces, from Summers as well as Subramanian et.al. were very interesting.
First, I agree with the general "offense taken" to Summers article. It is ridiculous that the "cheerleaders" of globalization now come around to argue that outcomes of the process have to be more closely aligned with the "interests of the middle class in rich countries." The cheerleaders themselves have always maintained that the best argument for their programs was its impact on the poor in developing countries -- claiming the moral high ground. Who are they to say, now, that it is Joe and Jane GasGuzzler globalization has to work for? Summers, in undisguised hypocrisy, takes sides against the poor.

More generally, I think that we are seeing a shift in the debate about globalization. Only the LDCs are still fighting with Washington consensus ideology, and rightfully so. Emerging and middle income economies don't owe anybody -- particularly the IMF -- and by that mere fact carve out policy space, despite multilateral (WTO) agreements, to make globalization work for themselves. They want this process to go on, not have it realigned with Joe and Jane GasGuzzler.

Both I read between the lines in your colleagues piece in yesterday's FT.

[Phil]

"Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit."

I'm sorry, was this really an assumption made? If so, why? Maybe my economic theory is shaky, but I thought the assumption was that although there will be winners and losers, the winners will win more than the losers lost (not that the winners will be more numerous than the losers...that seems like a much harder claim and one that doesn't at all follow). Maybe I took a different international economics class than Kapur and Subramanian, but I don't remember this assumption.

[Chandan]

I see a tectonic shift in Summer's argument about globalization. Having attended some of his lectures (oh, how can I forget his vociferous argument with Spence on industrial policy), I see Larry's latest opinion pieces as opportunist ideas, which view welfare of the world based on the gains and losses of the US (particularly, the US middle class)! The last two FT pieces of Summers's is contrary to his cheerleading stuff earlier on.

[Chandan]

I see a tectonic shift in Summer's argument about globalization. Having attended some of his lectures (oh, how can I forget his vociferous argument with Spence on industrial policy), I see Larry's latest opinion pieces as opportunist ideas, which view welfare of the world based on the gains and losses of the US (particularly, the US middle class)! The last two FT pieces of Summers's is contrary to his cheerleading stuff earlier on.

[Chandan]

I see a tectonic shift in Summer's argument about globalization. Having attended some of his lectures (oh, how can I forget his vociferous argument with Spence on industrial policy), I see Larry's latest opinion pieces as opportunist ideas, which view welfare of the world based on the gains and losses of the US (particularly, the US middle class)! The last two FT pieces of Summers's is contrary to his cheerleading stuff earlier on.

[paine]

"I think it does the cause no good to throw the "protectionist" label around whenever someone expresses doubts about the current rules."

exactly !!!!!

larry has his darker reasons no doubt

but he's no nationalist
he remains a globalizer
he comes not to bury
open border capital transfering
---let alone trading ---
but to reform it ..

to prempt
nationalistic class loser based protectionism
by broading globalizations
winners
by enlerging the horde of
" positive stake holders "

all to fight the good
border freeing fight
not just for another day
but for all time

[Publius]

I buy most of your arguments regarding constraint-targeted development, etc., but I do wonder if it would make more sense to focus on the "better social programs" than the international rules, and that you might not be predisposed to the former given your area of study. How have you come to believe that international rules, not social programs are the answer to the inefficiencies and/or injustices you see?

I am inclined to see the "American" constraint as more education-driven than anything else. The ROI is large. The inequality reflects the education divide. Why is that less important than international rules, and why should international rules be the constraint we focus on?

[shashank]

I think Dani and the comments are missing one point. We can welcome Summers' defection from the globalization camp. But what about all those domestic measures that he has supported dismantling: estate tax, balanced budgets, cutting social programs. Summers message was sinister not because he has changed his mind about globalization. it is because blaming globaliztion has become an alibi for supporting policies that favor the rich.

[Chris U]

Leaving aside the US/Summers perspective, i am interested in the development angle. Kapur et al. are arguing that the current rules regulating globalization are actually ok for developing countries. Rodrik thinks changing these rules is a first order priority for promoting development because they are too restrictive. It seems we are talking about different developing countries?
The second key question Rodrik has to answer is given the tenuous political coalition historically in favor of free trade, can we take a pause to adjust the rules of globalization without threatening the free trade/globalization coalition for a very very long time with negative implications for ALL countries. It is the political economy stupid is what Kapur et al. are really saying.

[wjd123]

"Mr Summers is right to worry that US workers have not benefited as much from globalisation as US capital; stagnant median wages and rising inequality are proof enough.

"He is also right to assert that globalisation requires democratic legitimation.
But the argument would be more persuasive if he did not privilege the demands for political legitimation within the US. The terms of what constitutes just globalisation cannot be determined unilaterally from the standpoint of the gains and losses within the US. It has to be determined co-operatively, involving discussions over the costs and benefits to all, especially those least able to defend their interests in both rich and poor countries."--Kapur, Mehta, Subramianian

Just how is this compromise to be found when the rules and regulations we have in our political economy are used against us when competing globally. This attack on our political economy is intensified when our every effort to insist on standards in trade agreements is seen as an attack on poorer countries comparative advantage: cheap labor. And even if standards were part of trade agreements it's doubtful that poorer countries would have the wherewithal to enforce them if they wanted to. It's also doubtful that many governments would have the will to enforce standards in the first place.

The interests of the poor in developed countries and the interests of the poor in developing countries might be similar but an ethical gulf separates them. The simple fact that "ought implies can" makes combining their interests untenable.

Poorer countries don't have the ability to enforce our standards, and many don't have governments that allow them to change policies with a vote.

I don't understand the authors call for shared legitimacy. I could understand it if they were speaking of the EU, but not countries where the gulf between values, wealth, and political economies is vast.

Yes, we should take into account other countries interests, but we don't have to suspend credulity to do so.

Perhaps the authors believe that since India has the "democratic legitimacy required for globalisation" a "just globalisation" would require that India be given greater latitude in trade matters than non-democratic countries such as China. I don't know if this is what they meant, but if it is, I would agree.

The compatibility of different political economies is a problem. I for one hope that American voters won't keep allowing politicians to ignore it.

What these professors are asking us to do is to engage in discussions until global corporations in the name of competition hollow out the rules and regulations of our political economy. In time the actual protections of our political economy won't be much different from those of the poorest and most undemocratic countries we trade with. I vote no.

[hari]

I've followed Larry's argument (FT) and agree he's, in fact, arguing against (!) protectionist forces in US Congress and may be next WH occupant. He's positioning his policy stance, I suspect, to avoid conflict of interest with Dems.

Is it a flip-flop or what?

Institutional reform of WTO may or may not transform international trade developments in (international) division of labour and global credit markets to boot.

Global political economy under globalization has apprently leveraged Asian emerging markets, in particular. And there is no sign they're willing and ready to adjust the current state of affairs - even if OECD block may be prepared (now) to rethink their earlier WTO stance on framework of policy and whatnot.

The current global credit crunch and inflation pressure is not going to diffuse the issue any sooner either.

It's the global political economy - stupid!

[kris]

The US economy has benefited from a policy of forcing open foreign markets to american goods for many years now. It will not be particularly acceptable to other economies when their attempts to do the same are blocked. In this spirit, I agree with Kapur and Subramanian. This particular antiglobalization stance is opportunistic and hypocritical and I think will be perceived as such by other countries.