The Globalization Paradox: Why Global Markets, States, and Democracy Can't Coexist

Dani RodrikMarch 2011

A story of beavers and the fur trade• Great demand for beaver in 17th

century, considered at the time the most valuable fur

• King Charles I prohibited the use of any other material besides beaver fur in making hats

• Fur traditionally supplied by Russia, through the Baltic and Black Sea

• But depletion of beaver stock due to over-hunting

Fur trade in the 1660s• the discovery of America and

With large supply of beavers in the North, an alternative source of beaver fur is established

• Fur trade dominated by the French monopoly and the land route in “New France”

• Fur brought to French towns by Indians themselves

• Two frustrated traders/adventurers, shut out by the French, look for alternative route, through Hudson’s Bay to reach Indians directly

• They travel to London and convince Prince Rupert, the cousin of King Charles II, to take an interest and sponsor a ship to sail through Hudson’s straits and establish a fort on the shore of Hudson’s Bay (named Fort Rupert)

Radisson and des Groseilliers

The Hudson’s Bay Company• The Nonsuch sails from

London on the morning of June 3rd, 1668, with des Groseilliers on board

• It spends the winter on Hudson’s Bay, where des Groseilliers makes contact with the natives and makes his first purchases

• Upon its return, the King grants a charter and monopoly rights to “The Company of Adventurers of England tradeing into Hudsons Bay” which is established on May 6, 1670

• The company is given property rights over the entire land whose rivers drain into Hudson’s Bay, which came to be named Rupert’s Land

Prince Rupert

The first public sale of beaver furs in London from the Company

The royal charter

Whereas Our Deare and entirely Beloved cousin Prince Rupert [and others] … have at theire owne great cost and charge undertaken an Expedicion for Hudsons Bay in the North west part of America for the discovery of a new Passage into the South Sea and for the finding some Trade for Furrs Mineralls and other considerable Commodityes and by such theire undertaking have already made such discoveryes …

whereof there may probably arise very great advantage to us and our Kingdome …

Doe give grant and confirme … the sole Trade and Commerce of all those Seas Streightes Bayes Rivers Lakes Creekes and Soundes in whatsoever Latitude they shall bee that lie within the entrance of the Streightes commonly called Hudsons Streightes together with all the Landes and Terriroryes upon the Countryes Coastes and confynes of the Seas Bayes Lakes Rivers Creekes and Soundes aforesaid that are not already actually possessed by or granted to any of our Subjectes or possessed by the Subjectes of any other Christian Prince or State

And further We doe .. create and constitute the said .. Company for the tyme being and theire successors the true and absolute Lordes and Proprietors of the same Territory lymittes and places aforesaid

The rights granted under the Charter• The charter granted a monopoly over trade• It also gave ownership of vast tracts of

land (40% of today’s Canada) directly to the company

• It gave the right to make laws and administer justice in the territories over anyone living there (not just the Europeans but the Natives as well!), to wage war and military campaigns (against non-Christians)

• The company eventually became a state in all but name, even issuing its own coins, which were accepted as a medium of exchange over its territories

Hudson’s Bay Company territory 1670 to 1763

The quid pro quo• des Groseilliers and company undertook

investments and enforced rules (relating to knowledge, security and contract enforcement) that made long-distance trade possible:• Establishing the possibility and safety of the naval route

to Hudson’s Bay• Undertaking exploration inland• Building forts and trading posts• Establishing relationships with the Indians• Providing knowledge about the types of goods Indians

were interested in buying in exchange (“market research”)

• Pacifying and making treaties with the Indians• In return the Company was provided monopoly

rights by the sovereign• To compensate for those costs, as well as provide for

handy profits eventually

Trade and rule

• Markets need an infrastructure of rules and governance• Markets not self-creating, self-regulating, self-stabilizing

• Long-distance trade particularly prone to weaknesses of “governance”

• Need “institutions” to make the rules and enforce them

• Those institutions can take different forms• chartered trading monopolies one mechanism, but not the only possible one

19th century imperialism• Free trade and Gold Standard maintained in part

by a “belief system”• But also by imperialism, in overt or disguised form

• Gunboats to enforce debt contracts • Free trade treaties with Ottoman, Chinese, Japanese

• “Anglobalization”• “no organization in history has done more to promote the

free movement of goods, capital and labour than the British Empire in the nineteenth and early twentieth centuries.” (Niall Ferguson)

• The mercantilist and “liberal” models of globalization both required:• Subjugation to foreign powers• Subjugation of domestic economic considerations to the

requirements of international markets

The Bretton Woods compromise• The lesson of the interwar period

internalized• The clash between domestic politics and globalization’s rules• collapse of Gold Standard in 1931

• Need to create space for domestic policy requirements

• A limited globalization, that prioritized domestic needs• Room for Keynesian policies, welfare states, activist industrial restructuring policies• capital controls; fixed, but adjustable ERs• GATT regime full of exceptions

The push for hyper-globalization

• WTO + Financial globalization• Maintained assumptions:

• There would be strong enough global rules, • And if not, we could wait for the rules to catch

up with markets• Rules would carry legitimacy even if they constrained democratic choices

• Results:• Legitimacy deficit• Financial crises • Uneven development record

• greatest successes (e.g. China) are those that play by BW rules

What options do we have to address these problems?

Option 1

Golden Straitjacket

National sovereignty

Hyper-globalization

minimize transaction costs, never mind legitimacy and adverse cross-border spillovers

Option 1

Golden Straitjacket

National sovereignty

Hyper-globalization

Problem: not clear if compatible with democracy

(Friedman’s Coke and Pepsi)

Examples: Great Britain 1931, Argentina 2000-01; Greece 2010?

Democratic politics

Option 2

National sovereignty

Hyper-globalization

Democratic politics

maximize democratic legitimacy at home and minimize adverse spillovers, even if it comes at the price of transaction costs at the border

Bretton Woods compromise

Option 2

National sovereignty

Hyper-globalization

Democratic politics

Problem: globalization must remain incomplete

Remember Bretton Woods

Bretton Woods compromise

Option 3

National sovereignty

Hyper-globalization

Democratic politics

Global

governance

minimize transaction costs, but try to build legitimacy and constrain spillovers through global rules

Option 3

National sovereignty

Hyper-globalization

Democratic politics

Global

governance

Problem: requires significant restraint on national self-determination and therefore regulatory, institutional, and policy diversity

Democratic politics

The political trilemma of the world economy

Golden Straitjacket

Pick two, any two

Global

governance

Bretton Woods compromise

National sovereignty

Hyper-globalization

Which option do you choose?

Why the different solutions in different domains?

• Chinese exports of toys containing lead paint (health and safety standards)• Bretton Woods compromise

• The spread of the sub-prime mortgage lending crisis from the U.S. to the rest of the world through CDOs (financial crisis)• Global governance

• Imports of good made with child labor (labor standards)• Golden straitjacket

New traffic rules for the world economy: some guidelines

• Countries have the right to protect their own social arrangements and institutions • But not to impose them on others

• The objective of international economic arrangements must be to attain the maximum “thickness” in economic transactions (in trade and investment flows) that is consistent with maintaining space for diversity in national institutional arrangements.• Enable like-minded countries to deep integrate• When deep integration is not feasible or desirable, rely on traffic

rules to manage interface among national institutional arrangements

• These traffic rules must create “policy space” to allow: • rich nations to provide social insurance, address concerns about

labor, environmental, health, and safety consequences of trade, and shorten the “chain of delegation”

• poor nations to position themselves better for globalization through economic restructuring

• all nations to create financial systems and regulatory structures more attuned to their own conditions and needs

Why the world economy is not a “global commons”• (Misleading) analogy with climate change

• where in the absence of global coordination, we get the “tragedy of the commons”

• But an open economy is in every country’s own interest• The terms of trade exception• The mercantilist exception

• When nation states have room to follow the policies that suit their circumstances best, the outcome is a healthy world economy, not slippery slope to protectionism• Need to economize on global cooperation in a G-0 world

Globalization’s future1. The good: managed globalization

• Better balance between the prerogative of nation states and international rules

2. The bad: business as usual• Continued reliance on (necessarily inadequate)

improvements in global governance and coordination

3. The ugly: return to the 1930s• Protectionist free-for-all