The Globalization Paradox: Democracy and the Future of the World Economy (review)

The ASEAN-China free trade agreement came into effect on 1 January 2010, creating a free trade zone that comprised one-third of the world’s population and one-tenth of the world’s GDP. Three other free trade agreements, the ASEAN-India FTA, ASEAN-Korea FTA, and the ASEAN-Australia-New Zealand FTA, came into effect on the same day, firmly establishing free trade as the basis of economic partnership in the Asia-Pacific region. Sadly, this momentous event for the world economy passed unnoticed by many Western observers.

This further proliferation of regional free trade agreements comes in the wake of rising global trade that led author Thomas Friedman to proclaim “the World is Flat”. Globalization has become a key driver of the world economy, accompanying strong economic growth and rising living standards for billions of people all over the world. Yet as globalization takes root in the East, support for free trade has been dwindling in the West. In both the United States and Europe, globalization has been blamed for stagnant wages, chronic unemployment, and the recent economic recession. It has become one of the most controversial issues of our times.

The growing importance of international trade makes Dani Rodrik’s new book a must-read for economists and politicians alike. In The Globalization Paradox: Democracy and the Future of the World Economy, Rodrik explores the relationship between international trade and domestic policy. Global trade, he argues, requires countries to replace local rules with international regulation, even when these conflict with domestic goals. A political trilemma between hyperglobalization, national sovereignty, and democratic politics is thus created. Similar to Robert Mundell’s impossibility triangle, Rodrik argues that all three ideals cannot coexist at the same time. If a country wishes to have both free trade and national identity, it gives up on democracy, as its national policies must align to international standards even if these run counter to domestic norms and expectations. On the other hand, if we want free trade and democracy, we must abandon the nation-state and shape all policies according to a global consensus. Rodrik makes the choice clear: democracy cannot be surrendered, and effective global government remains a long way from reality. The pursuit of full-fledged globalization must therefore give way to a shallower version of free trade.

Despite his apparent criticism of globalization, Rodrik is by no means a protectionist. He acknowledges that free trade provides a net gain to society and even claims to enjoy “bringing the uninitiated into the fold” by illustrating how tariffs lead to dead weight losses. Fortunately, the gains to free trade are already well understood by students of economics. Less obvious to economists, however, are the costs incurred from the integration of markets. Removing tariffs causes the whole pie to grow, but also redistributes large portions of the pie within society to create winners and losers. Some economists have suggested that proper systems of compensation can mitigate such redistributive effects, but in practice these are seldom easy to implement. More interesting is the fact that as tariffs get lowered, efficiency gains from free trade decrease but redistributive effects are amplified. Rodrik calculates that in the United States, where average tariffs are below 5 per cent, removing tariffs all together would reshuffle $50 for every dollar created in net efficiency gains. In Rodrik’s words, “it’s as if we give $51 to Adam, only to leave David $50 poorer”. This ratio is so high only because tariffs are already so low to begin with. If tariffs were at higher levels of about 40 per cent, as they are in some countries, then the ratio of redistribution to net gain would become much lower.

Every country thus has an optimal level of free trade that balances benefits and costs. Instead of indiscriminately integrating global markets, Rodrik argues that individual nations should be allowed to select their own level of free trade through proper democratic channels...