51: Why Everyone Is Freaking Out About Globalization

Joe Wisenthal is away this week. He is off globe trotting to some very exotic locations on a business trip for Bloomberg. So I thought as a sort of protest episode that Joe gets to go on an amazing trip to some very nice places with very good food and very luxurious scenery. We are going to talk about globalization and specific quickly, we are going to talk about the negative aspects of globalization. And here with me today as a replacement co host is Sid Verma. He is one

of the newest members of the Bloomberg Markets team. Say hello, said hi there, So Sid, You're actually the perfect person to talk about this because you've done an enormous amount of work on globalization and cross border capital flows and development over the course of your career. Right, yes. Um. For the last couple of years, I've written quite a lot about the opportunities and challenges brought by unfettered capital flows and the backlash against um, some trade policies that

have been UM implemented at the behest of Western backed institutions. So, UM, Yeah, I'm really excited to have this conversation. It seems like it really is the sexy topic of the momentum. We've obviously got Brexit votes, the rise of Donald Trump this year, declining trade flows, rising income in equality, political populism. It all seems to nurture a growing view that globalization isn't

just out of fashion, it's on life support. And our guests today, I actually really like the way you described him earlier. Um, it's Danny Roderick. He's an economist. He's also a professor of international political economy at Harvard, and you kind of said he was the original guy who started writing about all the negative aspects of globalization before

it was cool, right. Yeah. He refused to join in the congratulatory party two decades ago, UM, and he argued that economists probably overstated the benefits of globalization and that policy makers probably risk a backlash if they push ahead

with unfettered free trade and capital policies. So he's exactly the right economist to talk to on this topic, right, And in retrospect, it seems like the notion that a backlash was coming was very, very imprescient, because here we are in two thousand and sixteen and everyone's talking about the downsides of globalization on federal trade deals, rightly or wrongly. I should say, well, without further ado, Danny Roderick, thank you so much for joining us today. Nice to be

with you. Thank you. Should we maybe start with this idea of a backlash, you know, to what extent was the criticism that we are seeing now of globalization, To what extent was that inevitable based on what's happened over the past two decades and beyond. I think it was pretty inevitable. I mean it seemed clear to me that the deal position was going to be building up. I guess I wrote a little monograph um a couple of

decades ago called has Globalization Gone Too Far? And then you know, it was different kinds of characters that were sort of uh, it was Pat Buchanan and you know, in Europe it was the truckers protesting, and the agriculturalists and sort of where you know, sort of other kinds of people on the scene. But the general trends were pretty easy to see and and and they arose from some basic fundamentals that the the kind of overall economic

benefits of of globalization. You sort of began to be swamped by a lot of concerns about redistribution, about what was happening to specific communities, about the the elites getting sort of uh um uprooted from sort of the national setting and the larger gap opening up between the people who control the politics and what was happening and the ordinary people um and sort of you know, decision making moving away from national capitals to uh, weird places like

Brussels or Geneva or or sort of multinationals and banks including unclosed doors and and so historically, of course, this was also not the first time we were seeing this. That We've had an era of high globalization during the Gold Standard, and and it kind it came to a rather abrupt end for many of the same reasons. I don't think we're up quite the same kind of crisis uh at this point. I think the the globe kind of globalization we have has much firmer foundations than than

was the case under the gold gold standard. But I do think we have pushed it further than it can go, either economically actually or politically. I like the idea that we're not necessary early facing a huge crisis when it comes to a globalization backlash. What exactly can you spell out? What exactly makes it different this time compared to, for instance, the end of the gold standard. Yeah, I mean, I think we're in a much better you know, despite all

day the backlash. The fact is that we have much stronger institutions um today compared to the nineteen twenties and nineteen thirties, the inter war period when the gold standard eventually collapse. UM. We have much stronger governments that are providing much better safety nets. Uh. We have global institutions that provide for much greater global cooperation, the World Trade Organization and the IMF with nothing like that in the

inter war period. And by and large, I think, you know that people have incorporated the lessons of the rampant protectionism of the nineteen thirties, and and I think even the you know, the populist and the way they talk about trade policy. It's it's historically speaking, it's it's a rather measured kind of protectionism. I don't think smooth and holy would be something that that even Donald Trump would would bring up as something that that you would like

to to to reenact. So I think the intellectual consensus has actually shifted quite a bit. And even though they're a bit more done in dumps than usual, I mean, I think the political forces that push for open markets, um you know, big multinationals or banks or the trade elite date also happened to be much more there's still politically quite quite powerful. So I don't see a fundamental breaking down of the system and the way that that

we saw. But that doesn't mean that you know that you know, we could you know, seriously mismanaged the situation and in fact fuel the rise of the growth of populism that I think, you know, the damage will be not just to globalization. I think the damage will be to our liberal democratic order. Anythink that's that's in fact a much bigger price to pay. So, Danny, you mentioned the idea that globalization may in some way have been mismanaged. Can you spell out exactly what you mean by that

and give us maybe some examples. I think I I time the transition to the ninety nineties where I think we began to mosh push for a model of of globalization that I call hyperglobalization, which is where gradually globalization turned into an end for itself rather than being a

means to an end. And and we so increasingly governments negotiating deals or undertaking changes in policies that that that began to constrain um what they could do domestically, began to constrain the way that they could address domestic um concerns and UH and oversold the benefits of the resulting arrangements and didn't pay a whole lot of attention to the disruption that those things would cause. And I think

there are sort of two concrete things. One was the creation of the World Trade Organization in the nineties, which which went significantly beyond any trade agreement that had been negotiated. And what really stands out about the w t O is that it reached significantly beyond borders into deep domestic territory and economic policy making UH with growth sort of restrictions on on what governments could do in the way of dealing with subsidies in the area of health and

safety standards with respect to intellectual property rights. And on the financial side, of course, even though this was not an international agreement, by and large, complete mobility of capital, particularly of short term financial capital, became effectively the norm through the workings of the European Union and on and on a broader scale through the o e C. D UM and I think this this new um sort of

understandings from the nineteen nineties. On the one hand, you know, complete mobility of capital as a norm uh and uh and and trade agreements, you know, being no longer about tariffs and quotas at the border, but increasingly about domestic regulations and how those had to be coordinated and harmonized

across countries. I think sort of both um made domestic economic policy making much more hostage, left it much more hostage to uh this sort of you know, this anonymous force of globalization uh and and created this this juncture between sort of you know where uh, you know, the life that the ordinary people were living and their their own economic existence and the kind of policy making that happened at that sort of international sort of globalization or

hyper globalization driven sphere. We are going to take a quick break for our sponsors. But knowledge to work and grow your business with c i T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c I T dot com. Put Knowledge to work and we're back, Danny. I'm interested in this idea of globalization, hyper globalization, if you will, going too far.

And I always wonder how did that actually happen? Like did politicians just wake up one day and realize that there was a lot of opportunity for them personally in creating these sort of super national structures that they could then have careers in or walk us through this? How this actually happened? Um? You know, it's a combination as

usual of interests and ideas. On the one hand, of course, you had very specific interests at work, um, and so in in financial globalization, of course, they were you know, banks that became bigger and were interested in in in removing impediments to capital flows and across borders. You had multinationals who wanted to get market access and therefore were interested in in in reshaping the regulations of different countries. So as to remove impediments in terms of their being

able to access these markets. You had definitely interests at play,

but there was also ideas. I mean, there's sort of the whole you know, ideational context of how the things happened in the ninety nineties had as its background, of course, sort of the notion that you know, markets couldn't do much wrong, that that governments, when they intervened with on these sort of muck things around, and that you know, sort of that that trade liberalization in the fifties and sixties and seventies had been um, you know, had been

had produced the booming world economy, and therefore, which by the way, is true, but then sort of misleading conclusion was the wrong that therefore this was the most important thing to keep doing so effectively a good thing was taken too far in my view. And third, I would add that on top of of you know, sort of

the general mediational context and the interests of various actors. Um, I think there was a political failure on the part particularly, I would say, of the sort of you know what in the United States context, what would call sort liberals or left liberals, and in the United in Europe would be the socialists and the social Democrats a sort of a certain abdication of their responsibility, and they they bought into that whole story of how sort of, you know,

moving on this hyperglobalization agenda either was something that was necessary that they couldn't do much about it, or as was the case in many cases, that this is something that they should actually back, that they should support. So somewhat surprisingly, some of the the most avid supporters of financial globalization where the Socialists in France or the Clinton

Democrats in the United States. So I think, you know, sort of the political group that you might have thought would have acted as a break in fact, it was very much in behind this this push towards hyperglobalization. So I think that that's I think it's sort of the combination of the forces that brought us to to to where we are. So so where do we go going forward? Um, the Trans Pacific Partnership and the Transatlantic Trade Partnership deals

look like they don't have sufficient political backing. The IMF has issued a mere culpus saying that they have probably overstated the virtues of neoliberalism, which tends to argue for the wholesale privatization of companies, as well as a modest role for fiscal policy and fully open trade and financial borders. At the same time, you know, governments and the IMF are more sympathetic to the view that capital controls can shield themselves from volatility of international finance. Um. So you

know what, what where are we going next? Are there sufficient number of you know? Um? You know, is there a moral leadership on the international stage to try and craft a new trading model or is it just a model through scenario? Yes? So, as I said earlier, you know, I don't think the really bad scenario is one of a very high likelihood where we have a complete collapse of the world economy and and and globalization with all the really terrible political ramifications of the type that we

saw in the interwar period. But but leaving that aside, I think whether we take a relatively good path or relatively ugly path depends largely on how the mainstream political groups react, um. And and that's both sort of you know, center right, center left parties and also the technocratic establishment. Now, I think both of these groups have have are sort of halfway down the line. I mean, as you say, there has been a sort of a couple of sorts

on a number of different dimensions. Uh. You know that, you know, the free mobility of capital. I think sort of the consensus around that has dissipated, and even the IMF is saying, you know that that we need to, you know, accept that there are circumstances which capital controls might make sense. Uh. And there's sort of you know, wider agreement that you know, maybe we needed kind of a different models on trade negotiations, but we're not quite

there yet. And we see it, for example, in the way that you know, an institution like the IMF response to where we are. On the one hand, you have these sort of um revisions in its thinking. On the other hand, you have Christine Lagarde coming out and saying that, you know, we need to stay strong on trade and the only way that we can progress is by signing more trade agreements, and it's it's very important that we

do that. So I think, you know, the realization hasn't kin that the way that you respond to these things is not by you know, simply doing a better marketing job on the benefits of trade. That's not the issue. The issue is is that ordinary people feel that policymaking and and and and the technocratic and policy elites are pursuing a set of interest which is not theirs, and

and uh and and and. The main constraint that the world economy faces right now is not that it is not sufficiently open and so you need to sign new trade agreements. The main constraint is that it's lacking the legitimacy in the eyes of the ordinary people that you

need to sustain a moderately open economy. And once you realize that the main constraint is legitimacy, not lack of openness, then you have to really start thinking that that what we should be doing is not pushing for more trade agreements, but really fundamentally revisiting what we are negotiating when we

talk about trade. And we're not there yet. But Danny, this is why I get confused, because when people talk about reforming trade or better distributing the benefits of free trade, it seems like by doing that, by definition, you almost go into protectionism, right because you know, improving trade for one group is inevitably going to be good from their perspective and perhaps bad for someone else. So how do you make it better without automatically going backwards and entering

a sort of protectionist everyone for themselves game. Yeah. I think one of the obstacles in thinking creatively and productively about the world of trade is that we have this, you know, we we think about trade on what we're doing in trade as a so moving in this unidirectional uh sort of road that goes from you know, more open trade to less open trade. So it's you know, the battle between protection has been free trade. You know.

This may have been the battle that we were fighting in the fifties and sixties and seventies, and that battle has been won, and it's been won by by by free traders. But really since the ninety nineties and since the World Trade Organization, trade negotiations and trade agreements are not about free trade uh and and so you know, so what we're really talking about is not protectionism versus

free trade. Large part of the t PP is really about talking about regulations um and and and regulations that are fundamental to running in open economy uh and a market based system. The question is, you know, where should those regulations be designed, and what's the role of international

agreements or global market forces in shaping those regulations. So should corporations, for example, have access to a completely separate track in the way that they can pursue their interests and impose their own preferences on certain on governments when no other group NGOs or labor unions or others have a similar ability. So, of course I'm talking about the I S d S so called the Investor States Dispute Settlement System, which is part of the Transpacific Partnership and

other trade agreements. Are we talking about now, We're talking about, you know, the rules with respect to capital flows and capital account regulations and patent and intellectual property rights, and you know, what are appropriate rules in those areas for a country like Vietnam or her country like Malaysia, And

should those be designed by international agreement? And should the main act so we you know, shaping those regulations be banks and and and and and and large amountain national corporations. These are not issues that are helpfully discussed in in the light of you know, sort of protectionism versus free trade kind of a mindset, because they're not about those um and so that's why I don't think the issue is really love of of you know, if we if we don't negotiate T P P or t t I

P that we're necessarily falling into, um, a protectionist hell hole. Uh. The issue is can we have better rules that address issues of fairness, of distuputive justice, of equity UM in a sense that people want to make sure that the rules and regulations that affect their lives are made democratically in fluad that they can actually openly participate. And are we allowing for democratic deliberation, sufficient democrats deliberation for the

determination of such rules. So those are the kinds of issues, and I think they're certainly are the ones that ought to be discussed. I think that brings us quite neatly on to kind of two separate topics, whether it's trade globalization or financial globalization. But one way of looking at slowing globalization is a fact that trade growth has been weaker than GDP growth in recent years, UM, and that trade elasity, so called trade alasity, is projects to be

weak again this year. UM. And I know that you say that that's a very blunt way of looking at, you know, globalization, but it seems that trade volumes are weak and there seems to be an existential threat for emerging markets in the in the coming decades, given the fact that there are new manufacturing techniques that could increase

UM import, substitution and developed markets. You know what extent are you concerned that in emerging markets like the comparative advantage from new innovative technologies such as drive list cars, three D printing, and new softwares, because traditionally we know that for emerging markets to grow, they need to build

out competitive manufacturing hubs. Yes, I mean, first, I think the decline of trade volumes in relation to global output um in recent years that I don't think it's much to do with the populist backlash so far, So I don't think it's really driven through by the rise of protectionism. There are much you know sort of there you know, supply chains are being sort of brought in home because of technological changes um and and the slowing down of of of China and is also a very big factor

in that. So there are you know, what's happening to trade recently. I think it's largely driven by by economic and technological changes and not by the politics around trade. Although I do think that if we mismanage globalization, political risks and and uh, political barriers will start the player

all as well. But going back to the question of developing countries in emerging markets, I'm indeed very concerned by the fact that manufacturing is increasingly becomes becoming skill and technology and intensive and effectively compared to advantage in manufacturing is moving away from many low income countries. UH. And then the traditional route whereby countries developed very rapidly was

one of export oriented industrialization. That's of course what China did before China, It's what South Korea and Taiwan did before them, it was Japan. And what we see around the world these days is that that really a process of what I've called premature the industrialization in law to middle income countries that they're that they are becoming the industrialized at very low levels of development in manufacturing isn't

serving the kind of escalator role that it did. So you know, you know, a country like Ethiopia that really should in some sense ideally ideally placed to be the next sort of low cost source for manufactured exports um you know, has received some Chinese investment, but I really don't see it developing in quite the same way that the station countries before. And I think technology has a

lot to do with it. UM. You know, when we start talking about you know, three D printing of shoes, you've suddenly, you know, taken away, you know, one of the main mechanisms through which law in gump countries developed. UH. And you've taken that, that that escalator away from them, you know. So it is it is an issue that I think UM will mark developing countries in the decades ahead and of course going forward. UM. Financial globalization UM

is a big question mark. UM. You know, obviously we have a dollar driven global financial order, but nothing there's nothing new under the sun. UM. And you have been warning for years about the risks of boom bust capital

flow cycles. UM. Are you concerned that maybe emerging markets a bit too cautious to impose capital controls or moderate the pace of credit growth because there's a perception that you know, open financial markets can boost growth when you know that that contention isn't necessarily supported wholesale in economic theory.

I am, You're right that that there is. You know, on the one hand, there has been an ideological shift, as we talked earlier, that that even the I m F is not in favor of complete freedom of capital mobility understands that that developing countries may want to use capital controls. On the other hand, in terms of practice, there is still a certain amount of stigma, a certain amount of risks to policymakers um from from using capital controls. And I think what and I'm sorry, could you give

us any examples at all? Well, I mean, most you know, sub Southern African countries still maintain a large maintain fairly open capital accounts. And and you know what what they want to be is they want to be you know, seen as as you know, partily promising frontier market economies. So you know, you know, we have now this this this new notion that we marketing is frontier market economies and then that sort of as you know, as the

recipients of catal inflows and uh. And it doesn't seem like the right thing to do if you want to be perceived as a frontier economy to actively manage capital flows. So these countries are getting very mixed messages from official institutions and financial markets. And one thing that you know, the IMF could be doing that it's not doing is actually provide you know, active, uh technical assistance to how

capital accounts ought to be managed. UM. So it's one thing to say that it's you know, you should do it, maybe as a last resort, but it's okay. But you know, policymakers in developing world are really concerned that, you know, they don't know how to do it. They worry that that, you know, it will be very easy to to circumvent um controls, that there are not that many good examples around them. So I think that you know that it becomes, you know, the the relatively less risky thing to do

for reputational reasons enough to want to do anything. Um and uh, and I don't think um the international institutional and necessarily helping them all that much. We are going to have to leave it there, although I know we could keep talking about all of this for much much longer. Danny Roderick, thank you so much for joining us today. That was a pleasure. So said, that was your debut Odd Lots podcast. I feel like we managed to cover, um, quite a lot of ground. Uh. Let's see, we talked

about hyper globalization, technocrats, premature de industrialization. Uh. What kind of caught your attention the most? I think I'm a bit concerned about the policy prescriptions to try and address this big problem, because if you bulcanize regulatory and legal policy at national boarders, you're effectively increasing the cost of doing business, and you therefore increase costs for goods and services,

and that just unleash is bad inflation. UM. I'm just not sure this idea that supernational but bodies have just too much control, um, and therefore we should be responsive to democratic concerns. I mean, I guess I've now realized that I am a authoritarian um, and I might be

more right wing than I realized. Yeah. The one thing I wish we'd asked is whether or not Professor Roderick is happy with the fact that all of these issues seem to be getting more attention thanks to the rise of populist parties people like Donald Trump or the Brexit campaign in the UK, or whether he's concerned about the way in which those discussions are actually happening and whether the way they justcussions are unfolding ends up being detrimental

for everyone. I don't know. You know, I haven't seen anyone at Donald Trump Rilly hold up a sign arguing for control over pharmaceutical company Pharmaceutical legislation. UM. So yes, there is a big disconnect between the populist debates and

the policy debate. UM. I also think China is the elephant in the room as well, because you know, everyone argues that China should liberalize its capital, currency, and trade policies and that can help, UM, you know, rebalance its domestic economy and beef up its productivity, and if it does, it could boost global aggregate demand and give globalization a

new lease of life. But it seems that, you know, if you are against such liberalization efforts, UM, China should continue maybe with its status quo, and it seems like that could be quite a controversial stance to hold. I feel like we are going to be talking about all these issues for quite some time to come, but again we're going to have to leave it there for today. I'm Tracy Alloway. You can follow me on Twitter at

Tracy Alloway. And I'm sid Vernon. You can follow me on Twitter at under school said Verna, and Danny Roderick is also on Twitter. He is at Roderick. Danny, thanks for listening. But knowledge to work and grow your business with c I T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com put knowledge to work