The Globalization Paradox

Question 2

What is Rodrik’s trilemma?

Answer 2

We cannot simultaneously pursue democracy, national determination, and economic globalization.

Question 3

What is Rodrik’s choice?

Answer 3

Democracy and national determination should trump hyperglobalization. Democracies have the right to protect their social arrangements, and when this right clashes with the requirements of the global economy, it is the latter that should give way.

Question 4

What will re empowering national democracies do?

Answer 4

Place the world economy on a safer, healthier footing.

Question 5

What are transaction costs?

Answer 5

Different types of friction that prevent mutually beneficial trade or render it more difficult.

Question 6

How do we overcome transaction costs??

Answer 6

There must be a marketplace, bazaar, trade fair, an electronic exchange to bring the two parties at a transaction together. There must also be a modicum of peace and security for them to engage in trade without risk to life and liberty or concern for theft. There must be a common language. There must be a trusted medium of exchange (currency).

Question 7

What are institutions?

Answer 7

Social arrangements designed to reduce such transaction costs

Question 8

What are the three forms institutions come in?How are the three forms important to trade?

Answer 8

1. Long-term relationships based on reciprocity and trust = generate cooperation through repeated interaction over time 2. Belief systems 3. Third-party enforcement

Question 9

Repeated interaction and community norms work best when markets are mostly:

Answer 9

Local and small scale, when people do not move around much, and when the goods and services traded are simple, standardized and don’t have to travel over long distances.

Question 10

When we look at the size of the government across different societies, we uncover an amazing fact. What is it?

Answer 10

The more developed an economy, the greater the share of it’s resources that is consumed by the public sector. Governments are bigger and stronger in the worlds most advanced economy. Rich countries have better functioning markets and larger governments when compared to poor ones. Markets and states are complements.

Question 11

In 1990, why was Argentina’s economy so bad according to Domingo Cavollo?

Answer 11

Too much government discretion had resulted in a complete loss of confidence in Argentine policy makers. The private sector had responded by withholding its investment and fleeing the domestic currency.

Question 12

What did Argentina need to do to fix this problem?

Answer 12

Strict monetary discipline. Cavollo used the convertibility law to legally anchor the Argentine currency to the U.S. dollar at 1 peso per dollar, and prohibited restrictions on foreign payments. He also accelerated the privatization, deregulation, and opening up of Argentine economy.

Question 13

What did the Convertibility Law do in the short term? In the long term?

Answer 13

In the short term it eliminated hyperinflation and restored price stability practically overnight. It generated credibility and confidence, and let to largely capital inflows. Investments, exports and incomes all rose rapidly.

Question 14

What happened to Argentina in 1999?

Answer 14

Adverse developments in the world economy set the stage for an abrupt reversal in investors’ views on Argentina. Especially the devaluation of Brazil’s currency. Basically Argentina got fucked.

Question 15

So what ultimately went wrong for Argentina?

Answer 15

Domestic politics got in the way of hyperglobalization. They removed one binding constraint –monetary mismanagement –but eventually ran into another –an uncompetitive currency.

Question 16

What lesson can we learn from Argentina?

Answer 16

National democracy and globalization are incompatible. Democratic politics casts a long shadow on financial markets and makes it impossible for a nation to integrate deeply with the world economy.

Question 17

What is Tom Friedman’s Golden Straitjacket? What happens to politics?

Answer 17

The fixed rules to which all countries must submit: free trade, free capital markets, free enterprise , and small government. When you put it on, your economy grows and your politics shrink. Domestic politics are reduced to two choices, all other local ones are banished.

Question 18

Was Friedman right?

Answer 18

No. Argentina did everything he said, but in a democracy, domestic politics win eventually. Win push comes to shove, democracy shrugs off the straitjacket.

Question 19

According to Rodrik, what does hyperglobalization require?

Answer 19

Shrinking domestic politics and insulating technocrats from the demands of popular groups.

Question 20

How does globalization get in the way of national democracy through labor standards? How does this relate to outsourcing?

Answer 20

In a classical liberal doctrine, people are the best judge of their own interests and voluntary contracts entered freely must leave both parties better off. But, what is good for the individual may not be good for the whole. There needs to be societal rules and regulations, because if someone is willing to work more for less, these rules are the only thing stopping an employer. Now with outsourcing, the employer can finally hire those people instead. National regulations protect people from downward competition in employment practices from domestic workers, but not foreign ones.

Question 21

How does globalization get in the way of national democracy through corporate tax competition?

Answer 21

The international mobility of firms and capital also restricts a nation’s ability to choose the tax structure that best reflects its needs and preferences. It puts downward pressure on corporate tax rates and shifts the tax burden from capital, which it internationally mobile, to labor, which is much less so.