What Kind of Globalization?

Prof. Dani Rodrik | PASS Academician

What Kind of Globalization?

What’s the first thing that comes to your mind when you hear the word “globalization”?

You are likely to picture global banks, multinational corporations, container ships, the World Trade Organization, or possibly street protests against global rules of trade and finance. In our collective imagination, globalization has become nearly synonymous with a particular type of economic globalization.

It didn’t have to be that way. There was nothing foreordained in globalization taking on a largely economic character. Global supply chains and cross-border finance might seem to have been driven by exogenous trends in transportation and communication technologies. But in fact, economic globalization runs on an extensive infrastructure of rules and regulations. Some of these are formal and written into explicit contracts, as with global trade agreements, banking regulations of major financial centers, or the European Union’s Acquis Communautaire. Others are simply norms of good behavior that are internalized by policy makers, as is the case with maintaining open borders to capital.

We could have chosen instead to privilege different global rules, focusing on other dimensions of our global interdependence. We might, for example, have built a globalization for public health – targeted at preventing and mitigating health pandemics, with the World Health Organization at its center. Under such a globalization, nations would benefit from an effective advance warning system, a common information base, large research budgets on medical research and vaccine development, coordinated strategies for fighting health emergencies, ample financing for poorer nations, regulated border closures, and prohibitions on beggar-thy-neighbor measures such as export bans on medical equipment.

There were some attempts in this direction. The WHO was in principle in charge of coordinating national responses to a pandemic. Back in 2005, its latest set of International Health Regulations, revised in light of experience with the 2003 SARS outbreak, were signed on to by nearly 200 countries. But countries have flouted all these regulations during the present crisis, by not sharing data, for example, or imposing unilateral export restrictions on medical equipment and supplies. The WHO has been largely sidelined. The institution is mentioned these days more to reference its failures than as a symbol of global cooperation.

Or imagine if we had constructed a globalization focused on our enormous environmental challenges. Such a global order would be targeted at slowing down climate change and managing its consequences, and would have international environmental agreements at its center. It would entail, at a minimum, nationally-binding GHG emission quotas and/or carbon taxes, a large common research budget for renewable energy and green technologies, and plenty of financing for transition to green energy in low-income countries.

Even within economic globalization, substantially different variants are conceivable. During the heyday of the Gold Standard, roughly from the 1880s to World War I, workers were as free to move across national borders as capital. The Bretton Woods rules, which governed the world economy in the first few decades after the Second World War, placed much fewer restraints on nations’ fiscal, financial, regulatory, and industrial policies than has been the norm since the 1990s. International trade and long-term capital flows expanded rapidly nevertheless. When the Bretton Woods regime ran aground with the oil shocks of the 1970s, developing nations proposed a New International Economic Order centered on United Nations agencies where they had much greater say. Instead, after a brief lull during the 1980s, policy makers pushed for rules that served the interests of large corporations, financial markets, and skilled professionals quite well, but did not do much for others – those who did not have the networks, skills, or assets to profit from global markets.

Political settlements are the joint product of vested interests and prevailing ideas – and our present system of globalization is no different. Had there been powerful lobbies pushing for global cooperation over public health or the environment, or had policy makers not embraced narratives prioritizing economic efficiency and free trade under the misleading banner of “mainstream economics”, we might have erected one of the other types of globalization I just sketched. If we have ended up with today’s globalization, it is by choice, and not because technology or forces outside our control have demanded it.


Globalization requires rules. These rules are enforced either formally or informally, in the latter case through states internalizing shared norms of behavior. The key question that ought to determine whether a policy domain should be globalized is: does the domain in question necessitate global cooperation and coordination, or can we leave decision-making to national authorities without great cost to other nations?

Nearly all domestic policies create some spillovers across the border for other nations. So we might be tempted to answer this question in favor of globalist outcomes in almost all instances. Since what we do at home affect others, shouldn’t there be always some global rules that discipline national practices?

By this logic, there would be few policies that would be left strictly to national authorities. For example, our education policies shape our future comparative advantage, and hence the gains from trade of other nations. When we acquire a more skilled labor force, some of our trading partners may well end up worse off because their skill-intensive exports will face tougher competition. By the spillovers logic, education should not be left to national policy makers! Or to take perhaps an even more outlandish example, each nation’s rules on highway safety and speed limits should be subject to global discipline because these policies obviously influence the price of oil and hence the well-being of oil-exporting nations!

The reason that such examples don’t seem to make such sense is that there is a contending logic that pushes in the other, anti-globalist direction. Nations each have different needs and circumstances, and national political authorities are, in principle, the best judge of how to respond to those. In other words, nations should be free to choose what is best for them. Such freedom can be very valuable even when the argument for global coordination is otherwise unimpeachable. Returning to the present crisis, the case for global rules does not get any stronger than in the face of health pandemics such as COVID-19. Yet many believe the WHO erred early on, underestimating the magnitude of the Chinese contagion, and discouraging, wrongly, mask use by the general public and the shutting down of international travel. Nations that ignored the WHO and decided to go their own way had good reason to do so.

Hence every globalization regime faces a central tradeoff. Global rules have the advantage that they can maximize global efficiency, reduce transaction costs across national borders, and allow nations to reap the gains from trade and benefits of scale. But they have the disadvantage of reducing policy autonomy, hence inhibiting policy diversity and experimentation at the national level. A well-designed globalization regime would pursue an appropriate mix of global efficiency and policy diversity, without seeking to maximize either.

In global economics, architects of the Bretton Woods regime got the balance mostly right. Having lived through the Gold Standard’s eventful demise during the interwar period, John Maynard Keynes was keenly aware of the need to carve out space for national stabilization policies. He envisaged capital controls, to prevent disruptive speculative financial flows, to be an essential element of the post-war global economic system. In trade, the General Agreement on Tariffs and Trade similarly established a thin veneer of global rules, enabling a significant expansion of trade in manufactures while governments were left free to devise their own regulatory models.

The post-1990 push into hyper-globalization ignored the lessons of the earlier era. The World Trade Organization, established in 1994, and subsequent trade agreements pursued a model of “deep integration” under which domestic regulations (in health, environment, intellectual property, subsidies, industrial policies) were increasingly viewed as trade barriers, impeding global efficiency. The free flow of short-term capital became the rule, rather than the norm, imposing limits on countries’ monetary, fiscal, and tax policies.

A little appreciated irony of the post-1990 arrangements is that their greatest beneficiary was China, a country that played the globalization game not by hyper-globalization rules, but by Bretton Woods rules. China actively managed its exchange rate, restricted capital flows, and deployed a wide range of subsidies and other industrial policy tools, while taking advantage of other countries’ open markets, to engineer economic history’s most impressive economic growth and poverty reduction experience.


Beyond this basic trade-off, there are two sets of circumstances under which the argument for global rules carries significant weight. In economists’ technical jargon, these are “beggar-thy-neighbor” policies and “global public goods”. I will use these terms here because they have clear analytical content and cover very specific conditions. They clearly demarcate areas where global rules are necessary from those where they are not.

Beggar-thy-neighbor policies refer to policies that provide benefits at home only to the extent that they impose costs on foreign countries. Note that it is not enough that there be harm for others. The domestic benefits must be the direct result of that harm. The classic case is the abuse of monopoly power on world markets through trade restrictions. For example, some years back China imposed export restrictions on rare earth elements, used in many electronics products such as mobile phones. China has a near-monopoly in the production of these minerals and the policy was clearly aimed at jacking up world prices.

Another illustration is undervaluing the value of the national currency to gain a competitive advantage and “export” unemployment to other countries. This practice, common during the Great Depression of the 1930s, is what prompted the British economist Joan Robinson to coin the term “beggar-thy-nation”. A third example are tax havens. Some small nations such as Bermuda or the Cayman Islands maintain very low corporate tax rates to attract corporate headquarters. This results in substantial tax losses for other, higher-tax jurisdictions.

Global public goods (or bads) refer to circumstances where benefits (or costs) of national action are shared equally by all nations. The clearest and most significant example is climate change. Whether greenhouse gases are produced in my country or yours makes no difference to global warming. If I impose carbon taxes in mine, you benefit as much as I do. Under these circumstances, individual nations are likely to under-invest substantially in providing for the collective good and have strong incentive to free ride on other nations’ contributions – sadly an all-too apparent reality in climate change. Many aspects of fighting health pandemics also have a global public good nature. Early-warning systems, information collection, development of vaccines and medicines provide benefits to all nations regardless of where the investments are made. Our common humanity means that basic human rights – freedom from discrimination and degrading treatment – are yet another global public good.

These considerations clarify why climate change and global public health in particular call for globalizing policy. In these domains, we must move beyond the nation state and develop global rules that allocate responsibilities and prerogatives. On the flip side, these principles reveal that the case for global regimes is much weaker in other domains. This is especially true for economic globalization. Much of the effort and political capital invested in recent decades in building global rules for the world economy cannot be justified on the basis of these first-order considerations.

This may be a surprising claim. In the vernacular of the financial press, business circles, and policy technocracy, the world economy is a “global commons” that necessitates global cooperation. But the metaphor is misleading for the most part. There are some exceptions to be sure, and I mentioned the most important ones previously. Abuse of national market power, competitive currency manipulation, and tax havens do need to be disciplined through global rules. But the vast majority of the problems we encounter in international economics derive neither from beggar-thy-neighbor policies nor from failures to provide for a global public good.

In economics, virtue is its own reward. The policies that expand the national economic pie also tend to be good for other nations. Openness to foreign trade and foreign investment, full-employment policies, price stability, appropriate prudential regulation of financial institutions, growth-promoting structural policies are all the cornerstones of a healthy global economy. Well governed nations do not need persuasion from other countries to pursue such policies, because they are even more essential for the home economy to function well. Take free trade. As economists delight in demonstrating to first-year students, the point of free trade is to expand domestic consumption possibilities; it is not to confer benefits to other nations. The same is true for openness to long-term capital flows, growth policies, or macroeconomic stability.

There is a key caveat in the previous paragraph, and it shows up in the phrase “well governed”. Incompetence or the power of special interests frequently push governments to make mistakes that are costly to their economies, and hence to others’ as well. Trade barriers or subsidies may redistribute income to politically well-connected firms or sectors. Regulators may err in allowing banks to take excessive risks, increasing the likelihood of financial crises. Failures of this sort are common enough. But they do not arise from weak global governance. They are the product of bad local governance. The costs – to consumers, taxpayers, financial stability – are borne primarily at home.

It is possible that global rules might enhance national governance in some instances. Global information sharing, transparency norms, and rules that promote evidence-based decision making cannot hurt. But there cannot be a presumption that globalizing policy regimes will reliably prevent domestic policy mistakes. Global rules can be hijacked by special interests just as easily as domestic policies can, to overturn social contracts or arrangements in the broader public interest. Perhaps the clearest example of this is how big pharma has managed to rewrite global rules on patents to preserve and increase monopoly profits. It is no secret that the agenda of hyper-globalization has been set by multinational corporations and big banks, with labor, environmental and civil society groups typically on the defensive. Instead of targeting genuine domestic governance failures, global economic rules have been designed for the most part to privilege one set of distributive interests over others. The recent history economic globalization provides ample reason for global rules to be restricted to clear-cut instances of beggar-thy-neighbor and global public goods.


What kind of globalization should we seek then?

First, we should promote global rules that promise to produce benefits for all rather than to a few. This means we should prefer global rules that generate large overall gains. The trouble with much of the present-day agenda globalization in trade and finance is that the benefits are highly concentrated and the net gains meager, providing little scope for making all group better all. For example, large American and European firms stand to profit significantly from investment arbitration clauses – so-called investor-state arbitration systems (ISDS) – but the cost are borne by host nations and few others gain.

One area where there are huge unexploited gains is international mobility of worker. An increase in temporary labor mobility from poor to rich nations – through temporary visa programs and similar schemes – would generate massive economic gains. Without complementary measures, increased labor mobility may threaten some labor groups in the advanced nations. But the magnitude of gains in this instance readily permits redistributive schemes to advance the interests of all relevant stakeholders – migrant workers, workers in host countries, and businesses. A complete opening of borders to foreign labor is neither feasible nor desirable. But a controlled expansion of work visas, particularly for lower-skill work, paired with appropriate redistribution of the gains, is by far the most effective ways of enhancing global incomes.

Second, we should limit global rules to areas where the argument for constraining national policies is strong. This means we should focus in particular on disciplining beggar-thy-neighbor policies and enforcing the provision of global public goods. Global action against tax havens is an obvious priority, since tax havens are one of the clearest and most costly instances of beggar-thy-neighbor policy. The fight against climate change and coordinated action on global public health are obvious areas of global public goods. The political capital wasted to date on trade agreements would have yielded far superior returns if it were spent on limiting GHG emissions and preparing for health pandemics.

Finally, where there is no clear-cut case for global rules – either on beggar-thy-neighbor or global public goods ground – our goal should be to preserve space for national policy autonomy and institutional diversity. We can never be sure that national governments will do the right thing for themselves (and thereby for the world economy). But as long as political representation and accountability are vested in national governments, we have little choice. Policy experimentation, disciplined by national electorates, is the only path to prosperity all around.

In the end, a desirable globalization would keep policy makers away from areas where there are both gains and losses within societies, and get them to focus on areas where global cooperation can make nations better off in the aggregate. In economics, this will produce more a permissive regime overall in trade and finance, but tighter rules in a few areas such as tax havens and international labor mobility. The real investment in building global rules will have to come in non-economic areas – human rights, global public health, and climate change.



* An edited version of this article was published as “Globalisation after Covid-19: my plan for a rewired planet”, Prospect Magazine, May 2020.