Dani Rodrik's weblog

A video of my talk at Johns Hopkins, SAIS

Johns Hopkins SAIS has put up a video of my talk there yesterday on "The Globalization Paradox" and you can watch it here. You can barely see me, give the positioning of the camera, but at least the audio is pretty clear.

My interview on the dilemma of dirty hands

This isn't the greatest interview I ever gave, but it is on an interesting and challenging question: is it ever OK for an academic to work with and give advice to an authoritarian regime? My answer, despite the outcry against Harvard academics' relationship with Libya, is "yes" – although there are some hurdles one must clear. You must convince yourself (and others) that your help is sought not to legitimize the regime but to further ordinary citizens' interests, that there is transparency with regard to the financial relationship (if any), and that you constantly re-evaluate your entanglement to prevent "mission creep."

The interview was based on my Project Syndicate article here.

The exchange took place with one of radio's best interviewers, Robin Young, although Young herself would probably grant this wasn't one of her best days either.

The economics of a parable, explained

I thought it would be useful to clarify the economic theory that lies behind my parable on the global economy.  The book covers these issues at length, so I thought that the links with the parable, coming at the end as it does, would be obvious to the reader.  Obviously this need not be the case for those who haven't read the book and encounter the parable on its own. So at the risk of explaining the obvious, here we go.

The parable identifies three problems that call for collective action and exemplify one the central arguments in the book that markets and the state are complements. 

1. There is common-pool problem that markets cannot solve, in the form of incentives to overfish and deplete a commonly shared resource. The community's "solution" is to create a cooperative that restricts how many fish each individual fisherman is allowed to catch. This is a stand-in for all kinds of market failures (externalities, asymmetric information, etc.) that require public action.
2. Reducing the transaction costs associated with long-distance trade requires the building of an appropriate infrastructure (a paved road). In the parable, this is accomplished through the organization of a work brigade that cuts through the forest separating the two villages.
3. Trade creates some losers and therefore the potential of social conflict. The village responds by strengthening its existing mechanisms of redistribution and compensation (village feast).

The paved road enables much higher volumes of trade, but it also creates two additional problems.

1. It aggravates an existing market failure. Foreigners, who are not subject to the same regulations as the locals, can now come and fish in the lake disregarding the threat to the sustainability of the fish stock. I have in mind here the undermining of domestic regulations (in health and safety, finance, or labor markets) by competition that originates from jurisdictions with different regulations. As formulated in the parable, this is strictly an economic efficiency problem, although it could have distributional and social implications as well.
2. It aggravates a social problem. The greater ease with which trade can be undertaken and producers can move in and out of the village makes it more difficult to sustain the community's prevailing social bargain, namely that it is OK for fishermen to get rich as long as others are not being left too far behind. Fishermen become less likely to contribute towards compensation at the village feast, both because it is now easier for them to evade the requirements and because they can (with some reason) complain about the burden of the tax on their ability to compete with outsiders.

These issues generate conflict between different groups in society. The parable suggests that internal debate and deliberation can produce a reasonable a compromise. The compromise does not entail the blocking of trade or high barriers, as some groups want. But it does entail accepting some transaction costs on external trade and a departure from complete free trade (what I call "hyperglobalization" in the book).

Two further notes on this outcome. First, economic purists can complain that my "reasonable" solution is not the first best remedy to the identified problems. There may be better targeted policies to counter the efficiency and distributional problems highlighted in my parable. Trade interventions are rarely ever first-best.

Well yes, but as Avinash Dixit once wrote, the world is always second-best at best. It would be little comfort to the villagers to be told that they should resort to lump sum taxation, non-linear income taxes, or allocating property rights over the fish stock – when the practical implementability of such potentially more efficient solutions remains unclear. Chapter 6 of my book discusses in detail how thinking along first-best lines has led the world economy astray.

Second, trade enthusiasts will complain that if each nation ("village") is left free to enact its own trade policies, they will disregard the effects on other nations and the world economy as a whole will slide into protectionism. The fable is in part a counter-argument to this. When openness to trade raises overall national income, a properly structured political process should not have an anti-trade bias to begin with. And allowing greater "policy space" to individual nations will in fact make it easier to uphold the social bargains that enable openness to trade. A (small) deviation from the ideal of complete free trade (hyperglobalization) is a small price to pay for this. This argument is developed at length in the book, and the fable is meant to simply exemplify it.

This is not to say that there are no spillovers across borders. A country's trade restriction may worsen other country's terms of trade. So there is certainly room for multilateralism a la GATT. But I argue in the book for a "thin" version of multilateralism – along Bretton Woods lines -- that does not make a fetish out of minimizing any and all transaction costs to trade.

A parable for the world economy

(This is the Afterword that appears in my book The Globalization Paradox. It is an attempt to state the book's central argument in the form of a bedtime story.)

Once upon a time there was a little fishing village at the edge of a lake. The villagers were poor, living off the fish they caught and the clothing they sewed. They had no contact with the other inland villages, which were miles away and reached only after days of travel through a dense forest.

Life for the villagers took a turn for the worse when the stock of fish in the lake plummeted. Villagers responded by working harder, but they were caught in a vicious cycle. The scarcer the fish got the longer the hours that each fisherman spent on the lake, which in turn depleted the fish stock at an even faster rate.

The villagers went to the village shaman and asked for help. He shrugged and said, "What is our council of elders for? They sit around all day and do nothing but gossip. They should solve this problem." "How?" the villagers asked. "Simple," he said. "The council should set up a fishermen's cooperative that decides how much fish each man can catch in a month. The fish stock will be renewed and we will not run into this problem in the future."

The council of elders did as the shaman suggested. The villagers weren't happy that the elders told them how to run their business, but they understood the need for the restraint. In no time, the lake was overflowing with fish.

The villagers returned to the shaman. They bowed in front of him and thanked him for his wisdom. Just as they were leaving, the shaman said: "Since you seem to be interested in my help, would you like me to give you another idea?" "Of course," the villagers cried in unison.

"Well," the shaman said. "Isn't it crazy that you all have to spend so much of your time sewing your own clothes when you could buy much better and cheaper ones from the villages on the other side of the forest? They aren't easy to get to, but you would only have to make the trip once or twice a year."

"Oh, but what can we sell in return?" asked the villagers. "I hear the people inland love dried fish," said the shaman.

And that is what the villagers did. They dried some of their fish and started to trade with the villages on the other side of the forest. The fishermen got rich on the high prices they received while the price of garments in the village dropped sharply.

Not all villagers were happy. Those who did not own a boat and whose livelihood depended on the garments they sewed were caught in a squeeze. They had to compete with the cheaper and higher-quality garments brought in from the other villages and had a harder time getting their hands on cheap fish. They asked the shaman what they should do.

"Well, this is another problem for the council of elders to solve," said the shaman. "You know how every family has to make a contribution during our monthly feast?" "Yes," they replied. "Well since the fishermen are now so much richer, they should make a bigger contribution and you should make less."

The council of elders thought this was fair and they asked the fishermen to increase their monthly contribution. The fishermen weren't thrilled, but it seemed like a sensible thing to do to avoid discord in the village. Soon the rest of the village was happy too.

The shaman meanwhile had another idea. He said: "Imagine how much richer our village could be if our traders did not have to spend days traveling through the dense forest. Imagine how much more trade we could have if there was a regular road through the forest." "But how?" asked the villagers. "Simple," said the shaman. "The council of elders should organize work brigades to cut through the forest and lay down a road."

Before long, the village was connected to the other villages by a paved road that cut down on travel time and cost. Trade expanded and the fishermen got even richer, but they didn't neglect to share their riches with the other villagers at feast time.

As time passed, however, things turned sour. The road gave villagers from beyond the forest easy access to the lake and allowed them to take up fishing, which they did in droves. Since neither the council nor the fisherman's cooperative could enforce the fishing restrictions on outsiders, the fish stock began to deplete rapidly again.

The new competition also cut into the earnings of the local fishermen. They began to complain about the feast tax being too onerous. "How can we compete effectively with the outsiders who are not subject to similar requirements?" they asked in desperation. Some local fishermen even made a habit of absenting themselves from the village on feast days—the road had made it easy to come and go—and evaded their obligations altogether. This made the rest of the villagers furious.

It was time for another trip to the shaman. The village held a long and boisterous meeting at which each side argued its case passionately. All agreed that the situation was unsustainable, but the proposed solutions varied. The fishermen wanted a change in the rules that would reduce their contributions to the monthly feasts. Others wanted an end to the fish trade with outsiders. Some even asked to blockade the road with boulders so that no-one could enter or leave the village.

The shaman listened to these arguments. "You have to be reasonable and compromise," he said after some thought. "Here is what I suggest. The council of elders should place a toll booth at the entrance to the access road, and everyone who comes in and out should pay a fee." "But this will make it more costly for us to trade," the fishermen objected. "Yes indeed," the shaman replied. "But it will also reduce over-fishing and make up for the loss in contributions at the feasts." "And it won't cut off trade altogether," he added, pointing with his head to the villagers who wanted to block the road.

The villagers agreed that this was a reasonable solution. They walked out of the meeting satisfied. Harmony was restored to the village.

And everyone lived happily ever after.

A video of my talk on structural change and growth

Here is the complete video of my talk a couple of days ago at the World Bank. I am presenting my paper with Maggie McMillan on structural change and economic growth.

 

I hope Ann Harrison is still talking to me after what I said about her at the beginning...

There are people who do not like my book!

Guy Sorman's review of my book The Globalization Paradox has one good turn of phrase at the beginning, where he calls me "a liberal mugged by globalization." But from my perspective it is all downhill from there. I provide the link to the review in the interest of equal time for my critics.

The City Journal does publish good stuff, and ironically this neat piece on Turkey's Ergenekon lunacy appears on the same issue.

Martin Wolf: Doha is weakening the WTO

I am copying here Martin Wolf's comments on the Doha Round, as expressed on the CUTS-tradeforum. I find them remarkable because Martin simultaneously explodes three myths about the trade regime. First, he dismisses the "bicycle theory" of trade negotiations, which says that the trade regime will fall back into protectionism unless you keep liberalizing it. Second, he states that the fundamental motives behind Doha were political rather than economic. And third, he argues that Doha is doing more damage than good to the multilateral trade regime.

Doha was essentially a political response to 9/11. I supported it then because it indicated the global will to co-operate and sustain globalisation. Its chance of completion was in the first few years. Once the political reasons weakened, as they did, after Iraq and then the obvious fact that globalisation was ongoing, the will to complete this round disappeared. Today, no top-level politician would now use his or her desperately limited political capital to complete this round, which they see (rightly) as a low-level priority. After all, are we really living in an era of collapsing trade? Is protectionism rampant? Given the shocks of the last few years, it is almost astonishingly absent.

Then people will say that the WTO will collapse if we don't keep on doing rounds. I think that's absurd. Do we think the legal system will collapse if we don't go on writing more laws? At some point, we were bound to get to the point when a round failed. At some point, we would have to declare an end to rounds. Before 9/11, I thought we were already there. After 9/11, I thought it made sense to have one more go. I was wrong. Doha is weakening the WTO, not strengthening it.

So what now? Make the WTO work in a world without rounds, that's what. Move on. This is over.

Martin Wolf is right on all counts. And it is truly refreshing to see an economist openly admit to having been wrong.

For my own views on how Doha was misconceived and got off to a wrong start, see this Foreign Affairs piece.

UPDATE: Arvind Subramanian reminds me, correctly, that along with Aaditya Mattoo he has long been pointing to the inadequacies and irrelevance of the Doha agenda and the public denial on this since 2007.  See this, this, and this.

UPDATE:  And here is some prescient analysis also from Tom Palley.

Saif Qaddafi and Me

Not long ago, a Harvard colleague wrote to me that Saif al-Islam el-Qaddafi, a son of Libya's dictator, would be in town and wanted to meet me. He is an interesting fellow, my colleague said, with a doctorate from the London School of Economics and Political Science (LSE); I would enjoy talking to him, and I might be able to help his thinking on economic matters.

The meeting, as it turned out, was a letdown. I was first briefed by a former Monitor Company employee, who gently intimated that I should not to expect too much. Saif himself held photocopies of pages from one of my books on which he had scribbled notes. He asked me several questions – about the role of international NGOs, as I recall – that seemed fairly distant from my areas of expertise. I don't imagine he was much impressed by me; nor was I much taken by him. As the meeting ended, Saif invited me to Libya and I said – more out of politeness than anything else – that I would be happy to come.

Read the rest here.