The Globalization Paradox by Dani Rodrik, New York: Norton & Company, 2011. 321 pages.
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About the author
Professor Rodrik obtained his Ph.D. in economics and MPA from Princeton University. He also holds an A.B. from Harvard College. As of July 2013, he was holding a position as professor in the Institute of Advanced Study in Princeton. He worked at the J.F. Kennedy School of Government, Harvard University, before the current position. He has received two major internationally-recognized awards in political and social sciences (Dani Rodrik: Bio and C.V.).
He once held the editor’s position in a major journal. He has addressed several major memorial lectures across the globe. His articles have been published in several high-ranking journals in economics and political science. His 1997 book ‘Has Globalization Gone Too Far?’ was highly regarded as important in political economics in the past decade. It appears that Rodrik was skeptical about the nature of globalization a decade before the global financial crisis (Dani Rodrik: Bio and C.V.).
Summary of thesis
Rodrik’s main theme is that globalization needs to be regulated because of the absence of a global institution that sets rules and all nations comply. Rodrik starts to build his argument by examining the form of globalization that existed before the end of the 19th century. He looks at Hudson Bay Company and England East Indies Company among others.
He examines the role that these companies played. They were not only enterprises but also played the role performed by public institutions. International trade is limited by higher transaction costs than local trade.
Companies that operated before the end of the 19th century was granted monopoly status to allow them recover from higher transaction costs. Rodrik also looks at the companies that have succeeded in the 20th century in the period of globalization. He identifies that the East Asian countries succeeded because they regulated globalization to their advantage.
Review of the introduction
The author has produced a satisfying introduction that captures the major parts of his study. The author starts by identifying the global financial crisis as a failure of the global financial markets. He claims that “the crisis spreads so easily from Wall Street to other financial centers around the world because of commingling of balance sheets brought by globalization” (Rodrik xi).
He identifies the financial crisis in the Asian countries in early 2000s as an effect of international investors withdrawing money from the Asian countries as confidence on Asian economies was dwindling. It made the situation worse for the Asian countries.
The author does not explicitly claim that globalization is considered a threat because it has failed those that intended to benefit from it the most. Developing countries claim that the advanced economies set the rules for the rest to follow which might have created a bias. He considers Paul Samuelson’s remarks that “China’s gains in globalization may well come at the expense of the United States” (Rodrik xiv).
The author does not explicitly claim that globalization has been considered a threat because the US and advanced economies in Europe as losing to East Asian countries. However, he explicitly claims that the countries are losing because the East Asian countries are flouting the WTO rules to gain competitive advantage.
Rodrik praises Bretton Woods Compromise as the strategy that should remain untouched. He links the success of the East Asian economies to adherence to the Bretton Woods standards which allow globalization with regulation (Rodrik xviii). He looks at the effect of outsourcing to advanced economies (Rodrik xv). Markovic (49) has given a better elaboration on how Eastern Europe countries benefitted from the formation of the EU and through Western Europe outsourcing.
The author identifies the political trilemma of the world economy. There are 3 issues that cannot be pursued at the same time and be obtained. He identifies democracy, national determination, and economic globalization (Rodrik xviii). A nation can only pursue two of these goals and forego the third each time. The author is keen to establish that national goals should be prioritized before the global agenda.
The reader easily identifies the author’s side of making choices in several other occasions. The author clearly states that leaders should be decisive.
In the introductory part, the author explains the reason why a global market cannot have a democratic global governance institution. He states that “there are too many differences and among nation states for their needs and preferences to be accommodated within common rules and institutions” (Rodrik xix). Later, he uses the same idea to claim that China creatively used institutions designed to meet its unique economic system. The author is clear in providing reasons of why others succeeded when others failed.
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The author is not reluctant in identifying that economists have weaknesses too. They fashion new economic ideas in conferences and publications. The mainstream economics are heard and opposing voices are covered up in the new fashion (Rodrik xxi).
It is a well written introduction because it gives an accurate summary of the book’s content.
The main body
Rodrik builds his argument from an old story. He analyzes Hudson’s Bay Company (HBC) which was known as Governour and Company of Merchants Adventures. The author appears like a skilled storyteller from the point he chooses to start his story. He starts his story with an auction of beaver skin at Hudson Bay (Rodrik 4).
He captures the reader’s suspense. The reader would like to know how all of a sudden someone has accumulated a large stock of high quality beaver stock after a long period of shortage. Later, the reader is to understand that the large stock was a result of international trade. He indirectly captivates the reader about the benefit of international trade. It created plenty of a commodity that had become expensive because of its scarcity.
The author expresses the importance of institutions in conducting business. HBC performed the functions of a government when engaging in trade. It did the work of the police force, the army, and the central bank, among other functions (Rodrik 7). The company performed these functions because the institutions that perform these functions were lacking. The author seems to justify the monopoly profits. They are used to cover the high transaction costs.
Rodrik looks at both sides of the arrangement. It had the benefits of creating stability but the rules were set by a party with conflicting interest. HBC sets the rules when it was also the sole trader with the American Natives (Rodrik 9). The end result was that prices received by the natives were extremely low when prices paid to foreigners were very high (Rodrik 12).
He goes ahead to claim that the same situation always happens when dealing with advanced traders. The reader is left wondering whether the same situation happens today. It could fit the same situation that “developing countries complain the system is biased because it is the big boys that make the rules” (Rodrik xiv). The author does not explicitly match the case to modern trade but his description is well taken.
The author has used them to show the benefits of institutions, and the impact of transaction costs on international trade. He uses the HBC and English East India Company. He emphasizes their similarity to modern companies. These companies “paid dividends to shareholders back at home” (Rodrik 7). It is much the same as modern companies.
The next part that builds the author’s argument is the East Asia countries. The author examines these economies that have caught up with advanced economies despite starting at low level incomes. The readers would like to know what methods these countries used to succeed. The book accomplishes this goal. He explains the similarities among these nations.
They regulated globalization to their advantage. These governments spent heavily on investment before the private sector could take over (Rodrik 145). Even though the government enterprises failed, their main intention was to give demonstrations and training (Rodrik 154). It had worked in Japan before India and China took over. He draws the conclusion that economists have overlooked government intervention in the economic development of East Asian countries.
The author looks into South Korea and Taiwan development which started in the 1960s (Rodrik 147). These countries’ development was mainly driven by regional tension which is not different from the advanced economies in the world.
The author explains why different studies may claim that economies open to international trade are successful. He claims that studies had grouped countries that had regulated international trade as open to international trade. He explains that neither Taiwan nor South Korea “exposed its nascent industries until well into the 1980s” (Rodrik 147).
China is considered remarkably successful because by 1978 it was mostly rural (Rodrik 150). The author praises China’s institutional innovation. Sindzingre also emphasizes that “institutions essence depends on contexts” (3). The contexts can be based on transaction costs, and competition among other factors.
Chinese leaders did not follow conventional policies that were being advocated by the World Bank or other international organizations. The author also states that China was late to join WTO membership so that it could not be forced to apply rules that do not meet its needs (Rodrik 154). In his explanation, Rodrik shows that China had been gradually preparing to open up to international trade.
China was favored by a large domestic market. Investors were attracted to the large market which gave Chinese leaders an advantage to impose their rules on FDI. The rules favored the transfer of skills to Chinese citizens. Foreign investors were required to integrate a high Chinese content in their labor force up to 70% within a short period of time (Rodrik 153).
It forced investors to train local employees. Lee & Vivarelli discuss that globalization fails in some countries because “most FDI are characterized by labor-saving and skill-biased technologies” (16). Chinese leaders used a policy that made FDI beneficial to local human resource. Rodrik explains how the Chinese policy was able to regulate the common effect of FDI on employment.
Lee & Vivarelli (8) explain that Stolper-Samuelson (SS) theorem that predicts that FDI will demand low-cost labor in developing nations fails to apply. FDI usually involves technology-based skills that leave out the local labor force. Rodrik uses China to explain how to overcome such an impact.
The author shows through massive examples that economies need the helping hand of the government especially when they lack competitive advantage in international trade. He explains the paradox of globalization after examining East Asia countries. These are countries that have benefitted from globalization.
Most of them had set trade restrictions before catching up with advanced economies. He has also looked at poor countries and described their government withdrawal from investment. The author claims based on these cases that “reaping globalization gains may require an increase rather than a decrease in international transaction costs” (Rodrik 157). The reader can clearly see the basis of his point. Mauritius also followed the same restrictions as East Asia countries.
Rodrik view on the impact of globalization is similar to other authors. Sindzingre (12) claims that globalization has been pro-poor in other regions when it has done well with others. Lee & Vivarelli (12) also discuss that globalization has brought exceptional growth in China but it has increased poverty in Sub-Saharan Africa.
Rodrik has elaborated on the pressure put on developing nations to carry out structural reforms to gain from globalization. Markovic (27) discusses that globalization has influenced the rapid reforms seen in nations and organizations. It has an impact on workplace diversity. People from different backgrounds pursue common objectives. In the developing nations, the benefits of institutional reforms may have benefits far from globalization.
In the revisionist theory, the author criticizes those that led poor countries to open up to international trade without telling them that it is not the only item needed for success. He also emphasizes that infant industries need nurturing (Rodrik 163). Brazil had “stabilized, liberalized, and privatized” but still could not reap the benefits of globalization.
The author is also keen to examine that Brazil and India did not benefit from globalization because of the import-substituting industrialization (ISI) (Rodrik 168). The system was not focused on exports, but it helped to upgrade local expertise.
Rodrik gives a good explanation on why nations fail to achieve economic development. The main reason is that they follow rules that do not match their needs. Rodrik claims that most programs “are ready-made, undifferentiated, and fails to target an economy’s most severe bottleneck” (Rodrik 175).
When the policy makers target many areas, they spread resources over many programs which become inadequate to boost economic development. He proposes that nations should identify the part that would create the biggest improvement and focus on it. To strengthen this argument, the author has used China’s economy. China started with motivating agriculture in the 1970s, industries in the 1980s, foreign trade in the 1990s, and now it focuses on the financial sector (Rodrik 178).
Rodrik focuses on the success of East Asia companies and other advanced economies amid globalization. He claims that per capital income is high in advanced economies. Bruff (115) and Cobbett & Germain (111) establish that the Occupy Wall Street movement is against inequalities created by industrialization and globalization.
Lee & Vivarelli (12) also claim that globalization has increased inequality in a majority of countries. Ekins & Voituriez explain that for sustainability the “impact of trade liberalization on income and environment need to be assessed together” (113). Rodrik overlooks the distribution of income in economies that have benefitted from globalization.
Rodrik appears to claim that there is no government intervention in economies that fails to catch up with globalization. The reader may think that there is absolutely no government intervention in globalization. There is government intervention even in advanced economies through tariffs and other methods. The EU carries out protectionists strategies on its agricultural products (Ekins & Voituriez 289).
Andrews explains that government intervention also appears to have changed from “public Keynesian to private Keynesian such as low taxes, the credit card” (168). Public Keynesian involves increased government expenditure. There is always government intervention. Only its methods have changed. By Rodrik calling for government intervention, he appears to call for more trade restrictions in favor of local industries.
Rodrik appears to prefer more restrictions which are unpopular. The HBC adventures brought abundance of beaver skins to London. Caprio explains that “just as goods can be obtained more cheaply if foreign supply is permitted, so can capital” (269). Caprio explains both the benefits and risks involved with international financial markets.
Rodrik explains how China has reduced the exposure of risk from which other nations can learn. Caprio mainly focuses on global financial markets when Rodrik has focused on openness to international trade.
The author critically examines the works of other authors. He quotes Anne Krueger who wonders how a common economic theory of comparative advantage could have been forgotten when advocating for hyperglobalization (Rodrik 166). Rodrik discusses areas in which other economists may have read the wrong signals.
He uses the case of East Asia where markets were praised instead of government intervention (Rodrik 168). The author has used a combination of the more recent sources and old sources. Some of the sources are several decades old when the author refers to historical details. The author uses recent sources for comparison and analysis.
The book’s major strength is that it draws its conclusions from the experience of other nations. It also considers nations from different regions.
The book fails to explicitly analyze the impact of globalization on economies that were initially advanced when the failure of these economies to benefit from globalization as expected might be the inspiration for writing the book. He mentions that if the developing countries could have been the only ones losing to globalization, they could have been told to work harder (Rodrik 172).
The book differs from other books for its advocacy on increased regulation in favor of local industries. Globalization was expected to create increased competition that would force nations to upgrade their methods towards efficiency. The author is right to claim that in theory people shun protectionists’ ideas but in practice they appear to work.
He points out that the results of globalization are unexpected which makes it necessary that it be reviewed. The book has more importance today especially after the global financial crisis. There is also a confrontation among nations about China’s dominance by flouting the rules. The author identifies that global governance is unlikely which makes it necessary to use regulation on globalization.
The author uses multiple examples of nations in different continents. He examines their reasons for failure or success in globalization. He also draws from several economists and explains the reason for their perception. It is a book that is worth reading when a nation considers opening up to international trade. Government intervention is necessary and regulating globalization to protect local industries.
Andrews, Alex. “Perspective on the Global Financial Crisis.” Journal of Critical Globalisation Studies. 5.11 (2012): 167-171. Web.
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Caprio, Gerard. The Evidence and Impact of Financial Globalization, Burlington: Elsevier Science, 2012. Print.
Cobbett, Elizabeth, and Randall Germain. “Occupy Wall Street and IPE: Insights and Implications.” Journal of Critical Globalisation Studies. 5.6 (2012): 110-113. Web.
Dani Rodrik: Bio and C.V. 2013. Web.
Ekins, Paul, and Tancede Voituriez. Trade, Globalization and Sustainability Impact Assessment: A Critical Look at Methods and Outcomes, Abingdon: Routledge, 2012. Print.
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Rodrik, Dani. The Globalization Paradox, New York: Norton & Company, 2011. Print.
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