Tuesday, January 18, 2011

The "New Rules": Not New, Not Rules, and Not Helpful

. Tuesday, January 18, 2011

In anticipation of his new book The Globalization Paradox, Dani Rodrik imagines what a new Bretton Woods arrangement would/should look like, and comes up with this bizarre list of seven "new rules for the global economy". I'll take them in turn.

1. Markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. They rely on courts, legal frameworks, and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate. And all of this is true of global markets as well.

Umm... are there no courts? No laws? No regulators? No safety nets? No social insurance? No countercyclical fiscal policy? Rodrik and I are looking at different economies. Perhaps the precise mix of these does not satisfy Rodrik (although that shouldn't matter, since he adopts a pluralist position below), but he cannot seriously argue that they do not exist. As for "all of this is true of global markets as well", I'm not sure what he means, he doesn't elaborate, and this seems to contradict some of his later points. To whit:

2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities. The nation state lives, if not entirely well, and remains essen­tially the only game in town. ...

Agreed. But again, this is the status quo. We have some international agreements (he lists the Basel Accords and some WTO rules), but we maintain national standards in addition to those, and all of them are subject to approval from domestic polities. Is Rodrik asking for less international cooperation? What problem does he think that would solve?

3. Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best. The United States, Europe, and Japan have produced comparable amounts of wealth over the long term. Yet their labor markets, cor­porate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these “models” – a different one each decade – anointed the great success to be emulated. ...

Right. Again, this is the status quo. The Washington Consensus is well and truly dead, if in fact it was ever alive. The Brazilian model is different from the UAE model is different from the Chinese model is different from the Indian model is different from the German model, etc. No one is trying to coerce anyone else to adopt their system.

4. Countries have the right to protect their own regulations and institutions. ... We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threat­ens domestic practices enjoying broad popular support. If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates. ...

This is a major part of his previous book, One Economics, Many Recipes. I see this largely as status quo too, although I can see why there would be an argument. It's true that emerging countries were often bullied in previous trade rounds, but the failure of the Doha round is partial indication that emerging economies now possess a stronger bargaining position. As for the specifics he lists -- tax policies, financial regulations, labor standards, or consumer health and safety -- there are no international prohibitions limiting national sovereignty in these areas. In fact, WTO rules make explicit exceptions for things like consumer health. To the extent that governments are pressured to change national policies in these issue-areas, that pressure comes mostly from markets or global civil society, not foreign governments. Which is why there is so much cross-national heterogeneity over those policies.

5. Countries have no right to impose their institutions on others. Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. ...

Oh, I see. So you can use protectionism to uphold your own values, but only if that does not impose on others. Excuse me? A tariff or border adjustment is by definition coercive. Either you adopt my values or else you cannot make money in my markets. One cannot have this both ways, no matter how much one would like to.

6. International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should aban­don international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. A completely decentralized free-for-all would benefit no one.

What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit. ...

I guess the disclaimer is meant to head-off criticism that this explicitly violates everything that came before it. Other than the fact that it does, it is also meaningless. Traffic rules? Not including a speed limit? Does he mean, like, using your turn signal? I wish there was a for-instance here, because I cannot guess what Rodrik is driving at.

7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. ...

Look, either the norm of national economic sovereignty and the need for local decision-making and autonomy is important or it isn't. If it is, then regime type should be irrelevant. If it isn't, then #s 1-5 are irrelevant. Rodrik justifies this by saying that "legitimacy" comes from democratic deliberation, but what happens when democracy yields illiberal outcomes? When majorities oppress minorities? When majorities in one country oppress minorities in others? This is to elide the most obvious criticism, which is that democracy itself is in the eye of the beholder.

Looking over this list, there isn't a single thing that addresses any of the major issues facing the global economy, which Rodrik lists as "the eurozone crisis, global recovery, financial regulation, international macroeconomic imbal­ances, and so on". There are very few things that even count as functional "rules" in a way analogous to Bretton Woods. As general principles, almost all of them are already present in the status quo, and the ones that aren't (#7) are almost surely wrongheaded.

This column is intended as a precis of his forthcoming book, so maybe he offers better argument and example there. I hope so, because what's in the column is weak sauce.


The "New Rules": Not New, Not Rules, and Not Helpful
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