Globalisation becomes more divisive as it advances – Dani Rodrik

Globalisation tends to generate a stronger backlash as it grows stronger, as its effects in generating inequality and undermining workers’ rights come to outweigh gains from trade, Dani Rodrik said today (September 25).

The Harvard University professor said the gains from trade tended to tail off at higher levels of globalisation, but the “redistributive consequences”, concentrating income among a smaller group of people, continue to increase more or less linearly.

In this way, globalisation becomes more divisive as it advances, adding impetus to the sorts of political extremes that have been resurgent in many advanced economies in recent years, Rodrik told an audience at the European Central Bank.

Rodrik criticised economists for accepting too simple a model of the gains from trade. The textbook model implies that trade barriers prevent countries from specialising in the areas in which they are most productive. In this way, freer trade tends to ‘grow the pie’ and should make everyone better off.

But Rodrik said such analysis tended to focus on broad aggregate measures, ignoring the nuance in how globalisation affects communities. He cited empirical research on the effects of Nafta, which generated only small gains from trade for the US, but led to substantial declines in wage growth for communities that were opened to tougher competition.

Globalisation has created an “asymmetric opening up”, Rodrik said, in which capital has been allowed to flow freely across borders while labour has remained largely immobile within national boundaries and even within local communities. Labour in the US is “not that mobile, spatially”, he said.

This asymmetry has made it harder to compensate those who have suffered most from globalisation, Rodrik said. In Europe, the welfare state has helped soften the blow for workers who lose their jobs to increased competition, but businesses’ ability to flee tougher tax rules by moving their capital overseas has meant the burden of taxation increasingly falls on labour, making it harder to maintain generous transfers.

Globalisation has also undermined workers’ rights in jurisdictions where they are better protected, since work can be outsourced to jurisdictions with weaker rules, Rodrik claimed.

He suggested the rise of populism might have briefly jolted politicians into worrying more about the redistributive consequences of traditional economic policies. “I think in some ways the rise of populism was a shock to the system,” Rodrik said.

But he added “I think that has disappeared now”. He said the economic policies of populists such as US president Donald Trump and backers of the Brexit vote in the UK had proven so “crazy” that politicians from the old regimes can simply claim their policies are less bad, without contemplating serious reform.

In terms of a solution, Rodrik argued ideally trade negotiations would have moved “much slower on capital mobility” from the start. But now the “genie is out of the bottle”, future negotiations should focus on boosting labour mobility, for instance by using temporary work visas to allow much more regular migration of workers.