When the United States decides to specialize in producing Hollywood movies rather than textiles, its textile workers stand to lose. Not to worry, trade theorists respond, our analysis shows that the gains to the Hollywood producers will be sufficient to make up for the losses of the textile workers. It is nonsensical to argue that the gains are large while the amount of redistribution is small. And he outlined several other tensions created by trade. Without retraining or education, the latter would understandably be opposed to free trade.
Rodrik says that Bergsten deserves credit for backing his cause when many others were reluctant. But he also credits a seemingly unlikely institution, the IMF. In October , at its annual meetings in Hong Kong SAR, the IMF put forward its arguments why countries should not only lower restrictions on trade but should also move to relax restrictions on the movement of capital across national boundaries. Economists refer to the former as current account liberalization or convertibility and the latter as capital account liberalization or financial globalization.
At this time, several Asian economies were engulfed in a financial crisis that many attributed to the decision to open up to foreign capital flows. Along with Jagdish Bhagwati, a champion of free trade, and Nobel Prize—winner Joseph Stiglitz, Rodrik spoke up against this financial globalization.
Rodrik argued that the benefits that Fischer mentioned paled in comparison to the risks of increased volatility from the entry and exit of foreign capital. Rodrik also was skeptical of any benefits of long-term capital moving to the countries where it was most needed.
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Indeed, two decades later, the time for capital account liberalization has still not come. Evidence has accumulated that its benefits are difficult to establish, while the costs have been undeniable. Another study found that foreign capital increases volatility in developing economies.
The chief economist who followed Rogoff, Raghuram Rajan, showed that countries that grew rapidly relied less, not more, on foreign capital.
The recent global financial crisis turned a harsh spotlight on the effects of international flows of capital and triggered calls for a better system of global financial regulation. Worse, obsessed with the idea that globalisation threatens the social contract in rich countries, Mr Rodrik almost forgets that both rich and poor countries stand to benefit enormously from trade.
Thus the question in the rich world is not whether there are gains to be made there are or whether some people will lose they will , but how the gains from trade are shared out.
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Without trade, perhaps the most important engine of growth in poorer countries, workers in developing countries stand little chance of ever doing the same. Paying too much attention to rich-world worries about differences in social norms runs the risk of perpetuating them. Insisting that prescription is not the main purpose of his book, Mr Rodrik offers few policies to limit the costs of globalisation. And those are likely to do more harm than good. Such support would be gauged by compelling a country to gather testimony from all relevant parties.
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But this could easily be abused. Would consumers' voices really be heard above producers' cries for help? Or take his idea of a global tax on physical capital, intended to reduce the international mobility of employers.
This would make investment less profitable, so harming economic growth. And why should poor countries, which crave foreign direct investment, sign up? The point is not that a Panglossian view of globalisation is justified: there are certainly costs. Rather, it is that the protection of workers in rich countries, although it may be politically tempting, is an economic mistake—however it is dressed up.
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New to The Economist? Sign up now Activate your digital subscription Manage your subscription Renew your subscription. Author s : Rodrik, Dani. Abstract: The process that has come to be called "globalization" is exposing a deep fault line between groups who have the skills and mobility to flourish in global markets and those who either don't have these advantages or perceive the expansion of unregulated markets as inimical to social stability and deeply held norms.
The result is severe tension between the market and social groups such as workers, pensioners, and environmentalists, with governments stuck in the middle. The most serious challenge for the world economy in the years ahead lies in making globalization compatible with domestic social and political stability--or to put it even more directly, in ensuring that international economic integration does not contribute to domestic social disintegration.
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