Who predicted the rise of the populists? Part 3 – Dani Rodrik

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Dani Rodrik / Democracy / Economics / Edward Luttwak / Globalisation / Party System / Politics / Populism

Looking at who predicted the victory of the populists before 2016 helps us sift through the deluge of ex post facto rationalisations.

Third in this series is the economist Dani Rodrik. Unlike the other thinkers in this series Rodrik has not made a habit of prediction. While some of the predictions he has made have failed spectacularly. He appears not to have grasped deep political significance of his ideas until late in the day. Nonetheless, along the way Rodrik outlined a set of constraints on globalisation that shape the world of the populists and define the parameters for the mainstream response. In short – nation, democracy or global trade – we can’t have have all three.

1997 onwards – Dani Rodrik

In Rodrik’s view globalisation is a good thing but “hyper-globalisation” is not. The latter is globalisation without social protection. Open markets only succeed when they are embedded within social, legal and political institutions that share the benefits of capitalism. Rodrik believes that societies with the biggest governments, the most extensive and effective regulation, and the widest social safety nets do best from globalisation.

Globalisation is disruptive. It moves production and employment around creating large pools of winners and losers. Any society, especially democratic societies, will tolerate this disruption only if there is confidence that the process is fair and broadly beneficial. Unless there is redistribution of the gains from trade to the losers of globalisation, there is bound to be a backlash.

The arrangements adopted at Bretton Woods after WWII explicitly recognised that the operation of the global economy should be driven by the needs of individual nations, rather than the reverse. Globalisation ran off the rails when it adopted the idea that any restrictions on the flow of goods or capital across borders must result in a big loss of efficiency and economic growth.

Globalisation only works for everyone only if all countries abide by the same set of rules, hammered out and enforced by a technocratic super-national government. In 2000 Rodrik predicted that globalisation would eliminate the nation state and some sort of global federalism would take its place. By the time of the publication of his 2013 book he had begun to lose faith. In reality, most countries are unwilling to give up their sovereignty and their institutions. Instead they demand the freedom to manage their economies according to their own interests.

Rodrik’s achievement is the identification of an underlying trade-off. Democracy, national sovereignty and global economic integration are mutually incompatible. We can combine any two of the three. But we can’t have all three at the same time. Deep economic integration requires that we eliminate all transaction costs (including non-tariff barriers) traders and financiers face in their cross-border dealings. But the democratic decision-making of nation-states is a fundamental source of transaction costs.

How can this trilemma be navigated ?

Dani Rodrik globalisation trilemma

One option would be the global federalism Rodrik once favoured. We could narrow the scope of democracy to help facilitate global markets. Unfortunately experience shows this cannot be done at a global scale. The EU’s recent experience shows that it is difficult to achieve even among a relatively like-minded and similar countries.

A second option would be to maintain the nation state, while redesigning it around the needs of the international economy. The state that would pursue global economic integration at the expense of all else. But this requires strict limits on democratic decision making – “the golden straitjacket”.

The final option is to downgrade our ambitions for international economic integration. We would adopt a limited version of globalisation, similar to the post-war Bretton Woods regime (with capital controls and limited trade liberalization). This is the option now being pursued by the UK post the Brexit vote.

Any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. If we want democracy and national sovereignty we must limit global trade.

Commentary :

The recent history of the European Union, the Brexit vote and Trump’s victory on the back of votes from the post-industrial working class lend weight to Rodrik’s analysis. Just as predicted, there has been a backlash from the losers from globalisation. The European federalist model has also been challenged by electorates keen to maintain their national democracies.

At the time of writing the British government is currently trying to navigate a path through Rodrik’s trilemma. Should they stay a member of the Single Market and lose democratic control over immigration? Should they stay in the European Customs Union and lose control over trade policy? Or should they leave and accept significant non-tariff barriers to trade?

The key lesson from Rodrik’s work is that purely economic arguments in favour closer global integration should be treated with suspicion. No matter how far nations integrate there will always be an economic case to take another step. As some point on that path the impact upon democracy becomes unacceptable.

Although recent events back Rodrik’s analysis they cast doubt over his policy prescriptions. Redistribution is not the cure-all he imagines. European nations have actively tried to protect the losers of globalisation. With its Hartz IV reforms Germany drove down the wages of its working class to protect employment against competition from Eastern Europe and the Far East. France gives generous welfare payments to those impacted by globalisation. It has made a concerted effort to stave off globalisation, taking advantage of whatever protectionist measures are still available to it. Until now Germany has been rather more successful than France in holding back the populist tide. The National Front is far more of a threat than the Alternative For Germany. It is France that faces the threat of a populist electoral upset. Higher levels of income redistribution are clearly not the panacea Rodrik imagines.

It seems that Edward Luttwak was exactly right. He claimed the central issue of the day was ’employment security’ not economic insecurity and that redistribution was an irrelevance. Globalisation’s losers don’t want benefits, they want jobs. Income redistribution does not elmnate populism.

Part 2 – Richard Rorty

Part 4 – Peter Mair

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