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November 08, 2010


Tiezheng Li

Dear Prof. Rodrik

I appreciate your point that we cannot rely on technocrats for global governance and international rules must take into account the domestic politics.

But I cannot agree with your argument on China's accession to WTO and its effect on RMB undervaluation. RMB has actually appreciated since 2001. The investment decision in China is not because RMB is cheap.

Chinese state capitalism model provides every kind of investment incentives. Most attractive thing for capitalists is that you can finish an investment project in a very short time.

There are good economies of agglomeration. You will find the infrastructure and supply chain are all very convenient. Local governments use their abusive power to help with land using. Financial suppression in the banking sector forces the households to subsidies industrial growth.

WTO subsidy agreement can address limited kind of subsidy practice. Even we have a more vigorous rule, the system is complainant driven. Trade remedy will be applied only when there is an injurious domestic industry. This can hardly fix the market distortion at a much larger scale.

The macro imbalance is a result of domestic distortion created by domestic institutions. When an authoritarian country form a currency union with a democracy and allow free trade, given the drastic difference in domestic institution, the imbalance is a logic result.

Don Stoll

The linked Project Syndicate column elaborates helpfully on your Oct. 8 piece called "Can Developing Countries Carry the World Economy?" in which you observed that economic up-and-comers like China and Brazil “have so far shown little interest in contributing to the construction of global regimes” based on “rule-based decision-making, non-discrimination, multilateralism, transparency.” You noted that these had been hallmarks of mostly U.S.-created global institutions which, though constituting a platform for the economic rise of other nations, nevertheless promoted American interests—precisely why the U.S. wanted them, of course. Even as they assume global economic leadership, the Chinese and Brazilians and others like them will perceive (accurately) a steep climb ahead and so will sustain their systematic resistance to globally applicable rules, pushed by the U.S. not from altruism but from the mature economic strength that has enabled Americans to benefit by a certain leveling of the playing field.

Hence your uneasy conclusion on Oct. 8 that the “conundrum of global governance. . . will almost certainly get worse.” But the present post transcends that unease by drawing a rational conclusion from the scarcity of altruism. Why try to build the global economy on a chimeric foundation?

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