Original publication details: Excerpted from Dani Rodrik, Has Globa/ization Gane Too Far?

(Institute
for International Economics, 1997), pp. 2, 4-7, 77-81. Copyright 1997Institute for International
Economics,Washington, DC. AII rights reserved.
1focusonthreesourcesoftension betweentheglobal market andsocial stabilityand
offerabrief overviewof themhere.
First, reduced barriersto tradeandinvestment accentuatetheasymmetrybetween
groupsthat cancrossinternational borders (either directlyor indirectly, saythrough
outsourcing) andthosethat cannot. Inthefirstcategory areownersof capital, highly
skilledworkers, andmanyprofessionals, whoarefreetotaketheir resourceswherethey
aremost indemandoUnskilled and semiskilledworkers andmost middlemanagers
belonginthesecond category. Putting thesamepoint inmoretechnical terms, glob-
alizationmakesthedemand for theservicesofindividuals inthesecondcategory more
elastic - that is, theservicesof largesegments of theworkingpopulation canbemore
easilysubstituted bythe servicesof other people acrossnational boundaries. Global-
izationthereforefundamentally transforms theemployment relationship.
Sources ofTension
Theprocessthat has cometo becalled"globalization" isexposingadeep fault line
betweengroups who havethe skillsand mobility to flourishin global markets and
thosewho either don't havethese advantages or perceivethe expansion of unregu-
latedmarketsasinimical to social stabilityanddeeplyheldnorms. Theresult issevere
tensionbetweenthe market andsocial groups suchasworkers, pensioners, andenvi-
ronmentalists, with governments stuck inthe middle. [... ]
While1share the idea that much of the opposition to trade is based on faulty
premises, 1also believethat economists havetended to takean excessivelynarrow
viewof the issues. To understand the impact of globalization on domestic social
arrangements, we haveto go beyond the question of what trade does to the skill
premium. And evenif wefocusmore narrowly onlabor-market outcomes, there are
additional channels, whichhavenot yet comeunder closeempirical scrutiny, through
whichincreased economic integration works to the disadvantage of labor, and par-
ticularlyof unskilled labor. This book attempts to offer such abroadened perspec-
tive. Asweshall see, this perspective leads to aless benign outlook than the one
economistscommonly adoptoOne sidebenefit, therefore, isthat it servesto reduce
theyawninggapthat separatesthe viewsof mostcconornists fromthe gut instincts
of manylaypeople.
Dani Rodrik
Has Globalization Gane
Too Far?
28
These considerations havereceivedinsufficient attention intherecent academic lit-
erature ontradeandwages, whichhasfocusedonthedownward shift indemand for
unskilledworkers rather than theincreaseintheelasticityof that demando
Second, globalization engenders conflictswithinandbetweennations over domes-
ticnorms andthesocial institutions that embody them. Asthetechnology for rnan-
ufactured goods becomes standardized anddiffusedinternationally, nationswithvery
different sets of values, norms, institutions, and collective preferences begin to
competeheadoninmarketsforsimilargoods. Andthespreadof globalization creates
opportunities for trade between countries at verydifferent levelsof development.
This isof no consequence under traditional multilateral tradepolicyof theWTO
and the General Agreement onTariffsandTrade (GATT): the "process" or "rech-
nology" through whichgoods areproduced isimmaterial, andsoarethesocial insti-
tutions of thetrading partners, Differences innational practices aretreated just like
differerices in factor endowments or any other determinant of comparative advan-
tage. However, introspection and empirical evidence both reveal that most people
attach values to processes aswell asoutcomes. This isreflected in the norms that
shape and constrain the domestic environment in which goods and services are
produced - for example, workplacepractices, legal rules, andsocial safetynets,
Trade becomes contentious when it unleashes forces that undermine the norms
implicit in domestic practices. Many residents of advanced industrial countries are
uncomfortable with the weakening of domestic institutions through the forces of
trade, aswhen, for example, child labor in Honduras displaces workers in SOUdl
Carolinaor whenpension benefitsarecut inEurope inresponsetotherequirements
of theMaastricht treaty. Thissenseof uneaseisonewayof interpreting thedemands
for "fair trade." Much ofthe discussionsurrounding the"new" issuesintradepolicy
- that is, labor standards, environment, competition policy, corruption - canbecast
inthislight of procedural fairness.
Wecannot understand what ishappening inthesenewareasuntil wetakeindi-
vidual preferences for processesandthesocial arrangements that embody themser-
ously. In particular, bydoing sowecanstart to maleesenseof people's uneasiness
about the consequences of international economic integration and avoid the trap
of automatically branding all concerned groups as self-interested protectionists.
Indeed, since trade policy almost alwayshas redistributive consequences (among
sectors, incomegroups, andindividuals), onecannot produce aprincipleddefenseof
freetradewithout confronting thequestion of thefairnessandlegitimacyof theprac-
tices that generate these consequences. Bythe sametoken, one should not expect
Workersnowhavetopaya larger shareof thecost of improvements inwork con-
ditions andbenefits (that is, they bear agreater incidence of nonwage costs).
They haveto incur greater instability inearnings andhours worked inresponse
to shockstolabor demand or labor productivity (that is, volatilityandinsecurity
increase).
Their bargaining power erodes, sothey receivelower wages and benefitswhcn-
ever bargaining isanelement insetting theterms of employment.
The fact that "workers" can be more easilysubstituted for each other across
national boundaries undermines what manyconceiveto beapostwar social bargain
between workers and employers, under which the former would receive asteady
increase inwages and benefits in return for labor peace. This isbecauseincreased
substitutability results inthefollowing concrete consequences:
POLlTICAL GLOBALlZATION 1:THE DEMISEOF THE NATION-STATE? 226
Strike a balance between openness and domestic needs
isoftenatrade-off betweenmaintaining openborders totradeandmaintain-
social cohesion. Whentheconflictarises- whennewliberalizationinitiativesare
Policymakershavetosteer adifficultmiddlecoursebetweenresponding tothecon-
cernsdiscussedhereandshelteringgroups fromforeigncompetition through pro-
tectionism. I canoffer nohard-and-fast ruleshere, onlysorneguidingprinciples,
The Role of National Governments
broadpopular support for tradewhentradeinvolvesexchangesthat clashwith(and
.ode) prevailingdomesticsocial arrangements.
Third, globalizationhasmadeit exceedinglydifficultfor governments toprovide
social insurance- oneof their central functions andonethat hashelped maintain
.socialcohesionanddomesticpolitical support for ongoingliberalizationthroughout
me postwar periodo In essence, governments have used their fiscal powers to
insulate domestic groups fromexcessivemarket risks, particularly those having
anexternal originoIn fact, there is astriking correlation between an economy's
*""<;",",;~c"rptoforeigntradeandthesizeofits welfarestate. It isinthemost opencoun-
tries,suchasSweden, Denmark, andtheNetherlands, that spendingonincometrans-
fershasexpandedthemostoThisisnot rosaythat thegovernment isthesole, or the
best, provider of social insurance. The extended family,religious groups, andlocal
communitiesoftenplaysimilarroles. Mypoint isthat itisahallmarkof thepostwar
periodthat governments intheadvancedcountries havebeenexpectedto provide
suchinsurance.
Atthepresent, however, international economicintegration istakingplaceagainst
thebackground of receding governments and diminished social obligations. The
welfarestatehasbeenunder attackfor twodecades. Moreover, theincreasingmobil-
ityof capital hasrendered animportant segment of thetaxbasefootloose, leaving
governmentswiththeunappetizing option of increasingtaxratesdisproportionately
onlabor income. Yettheneedfor social insurancefor thevastmajorityof thepop-
ulationthat remainsinternationally immobilehasnot diminished. If anything, this
needhasbecome greater asaconsequence of increasedintegration. The question
thereforeishowthetension between globalization andthepressuresfor socializa-
tionof riskcanbeeased. If thetensionisnot managedintelligently andcreatively,
thedanger isthat thedomesticconsensusinfavor of openmarketswill ultimately
erodetothepoint whereageneralizedresurgenceofprotectionismbecomesaserious
possibility.
Eachof theseargumentspoints toanimportant weaknessinthemanner inwhich
advancedsocietiesarehandling- or areequipped to handle- theconsequences of
.globalization. Collectively, they point to what isperhaps the greatest risk of all,
namelythat thecumulativeconsequenceof thetensionsmentioned aboyewill bethe
solidifyingof anewset of classdivisions- betweenthosewhoprosper intheglob-
alizedeconomyandthosewhodonot, betweenthosewhoshareitsvaluesandthose
whowouldrather not, andbetweenthosewhocandiversifyawayitsrisksandthose
whocannot. Thisisnot apleasingprospect, evenforindividualsonthewinningside
of thedividewhohavelittleempathyfor theother side. Social disintegration isnot
aspectator sport - thoseonthesidelinesalsoget splashedwithmudfromthefield.
Ultimately, thedeepening of social fissurescanharmall. [... ]
227 HAS GLOBALlZATION GONE TOO FAR?
Do not neglect social insurance
Policymakers havero bear in mind the important role that the provision of social
insurance, through social programs, has playedhistorically in enabling multilateral
liberalization and an explosion of world trade. Asthewelfarestateisbeingpruned,
thereisareal danger that this contribution will beforgotten.
Thisdoesnot mean that fiscalpolicyhasto beprofligateandbudget deficitslarge.
Nor doesit mean abigger government role. Enhanced levelsof social insurance, for
better Iabor-rnarket outcomes, can be provided in most countries within existing
levelsof spending. This can bedone, for example, by shifting the composition of
incometransfersfromold-age insurance (i.e., social security) to Iabor-rnarket insur-
ance(i.e., unemployment compensation, trade adjustment assistance, training pro-
grams). Becausepensions typicallyconstitute the largest itern of social spending in
the advanced industrial countries, better targeting of this sort ishighly compatible
with responsible fiscal policies. Gearing social insurance more directly toward labor
markets, without increasing the overall tax burden, would beone key step toward
alleviatingtheinsecurities associatedwith globalization.
There isawidespread feelingin many countries that, in thewords of Tanzi and
Schuknecht, "[s]ocial safetynets have... been transformed into universal benefits
with widespread free-riding behavior, andsocial insurance hasfrequently become an
income support systemwith special interests making any effective reform very
under discussion, for example - ir makes little sense to sacrificesocial concerns
completely for the salceof liberalization. Put differently, aspolicyrnakers sort out
economic and social objectives, freetrade policies arenot automatically entitled to
first priority.
Thanks to many rounds of multilateral trade liberalization, tariff and nontariff
restrictions on goods andmanyservicesarenowat extremely Iow.levels in theindus-
trial countries. Most major developing countries havealso slashedtheir trade barri-
ers, often unilaterally and in conformity with their own domestic reforms. Most
economists would agree that the efficiencybenefits of further reductions in these
existingbarriersareunlikelyto belarge. Indeed, thedirtylittlesecret of international
economics isthat atiny bit of protection reduces efficiencyonlyatiny bit. A logical
implication isthat thecasefor further liberalization in thetraditional areaof manu-
factured goods israther weak,
Moreover, there isacasefor taking greater advantage of theWorldTrade Orga-
nization's existingescapeclause, whichallowscountries to institute otherwise-illegal
trade restrictions under specifiedconditions, aswell asfor broadening the scopeof
thesemultilateral safeguardactions. In recent years, tradepolicyintheUnited States
andtheEuropean Union hasgonein arather different direction, withincreaseduse
of antidumping measures andIirnited recourseto escapeclauseactions. Thisislikely
becauseWTO rules and domestic legislation maleethe petitioningindustry's job
much easierin antidumping cases: there arelower evidentiary hurdles than in escape
clauseactions, no determinate timelimit, andno requirement for compensation for
affected trade partners, as the escapedause provides. Also, escape clauseactions,
unlikeantidumping duties, require presidential approval in the United States. This
isan undesirable situation because antidumping rules are, on thewhole, consistent
neither witheconomics principles nor, asdiscussedbelow, with fairness. Tightening
therules on antidumping in conjunction with areconsideration andreinvigoration
of the escapeclausemechanismwould maleealot of sense.
POLlTICAL GLOBALlZATION 1:THE DEMISEOF THE NATION-STATE? 228
Do not abuse "[airness" claims in trade
Thenotion of fairnessintradeisnot asvacuousasmanyeconomists think. Conse-
quently, nations havetheright - andshould beallowed- to restrict tradewhenit
conflictswithwidely held normsathomeorunderminesdomesticsocial arrangements
that enjoybroad support.
But thereismuchthat isdoneinthenameof "fair trade" that fallsfar short of
thiscriterion. Therearetwosetsof practicesinparticular that shouldbeimmediately
suspect. Oneconcernscomplantsmadeagainstother nationswhenverysimilarprac-
ticesabound at home. Antidumping proceedings areaclearexample: standardbusi-
nesspractices, suchaspricingover thelifeof aproduct or pricingover thebusiness
cycle, canresult induties being imposed on anexporting firmoThere isnothing
Do not use "competitiveness" as an excuse for domestic reform
Oneof thereasons globalization getsabad rapisthat policymakersoftenfall into
thetrapof using"competitiveness" asanexcuseforneededdomesticreforms. Large
fiscaldeficitsor laggingdomesticproductivityareproblemsthat draglivingstandards
downinmanyindustrial countriesandwoulddosoeveninclosedeconomies. Indeed,
the term "competitiveness" itself is largely meaningless when applied to whole
economies, unlessitisusedtorefertothingsthat alreadyhaveaproper name- such
asproductivity, investment, an.deconomic growth. Toooften, however, theneedto
resolvefiscal or productivity problems ispresented to theelectorate astheconse-
quenceof global competitivepressures. Thisnot onlymakestherequiredpoliciesa
harder se11- whyshouldweadjust just for thesakeof becomingbetter competitors
againsttheKoreansor theMexicans?- it alsoerodesthedomesticsupport forinter-
national trade- if wehaveto do a11thesepainful things becauseof trade, maybe
tradeisn't suchawonderful thinganyhow!
TheFrench strikesof 1995areagood caseinpoint. What madetheopposition
totheproposedfiscalandpensionreformsparticularlysalientwastheperceptionthat
fundamental changes intheFrenchwayof lifewerebeingimposedtar thesakeof
international economic integration. TheFrench government presented thereforms
asrequired bytheMaastricht criteria, whichthey-were. But presumably, theMaas-
tricht criteriathemselvesreflectedthepolicymalcers'beliefthat asma11erwelfarestate
wouldservetheir economiesbetter inthelonger runoByandlarge, theFrenchgov-
ernment didnot makethecasefor reformonitsownstrengths. ByusingtheMaas-
tricht card, itturned thediscussionintoadebateonEuropeaneconomicintegration.
Hencethewidespread public reaction, which extended beyond just thoseworkers
whosefateswould beimmediatelyaffected.
Thelessonfor policymakersis,donot se11reformsthat aregoodfor theeconomy
andthecitizenry asreformsthat aredictatedbyinternational economic integration.
difficult." Further, "various government performance indicators suggest that the
growthinspending after 1960maynot havebrought about significantlyimproved
economicperformance orgreater socialprogress." However, social spendinghashad
theimportant function of buyingsocial peace. Without disagreeingabout theneed
toeliminatewasteandreforminthewelfarestatemorebroadly, 1wouldarguethat
rheneedfor social insurancedoesnor declinebut rather increasesasglobal integra-
tionincreases.Sothemessagetoreformersof thesocialwelfaresystemis,don't throw
thebabyout withthebathwater.
229 HAS GLOBALlZATION GONE TOO FAR?
"unfair" about thesebusinesspractices, asismadeabundantly clear bythefactthat
domestic firmsengageinthemaswell.
Thesecondcategory concernscasesinwhichother nations areunilaterallyasked
tochangetheir domesticpracticessoastoequalizecompetitiveconditions. Japanis
frequentlyatthereceivingendofsuch demandsfromtheUnitedStatesandtheEuro-
peanUnion. Amorerecent exampleconcernsthedeclarationbytheUSTradeRep-
resentative that corruption in foreign countries will henceforth be considered as
unfair trade. Whileconsiderations of fairnessandlegitimacywill guideacountry's
ownsocial arrangements, evenbyrestrictingimportsif needbe, suchconsiderations
shouldnot allowonecountry toimposeitsowninstitutions onothers. Proponents
of fair trademust bear thiskeydistinction inmind. Thus, it isperfectlylegitimate
for the United States to makeit illegal for domestic firmsto engagein corrupt
practicesabroad(aswasdonewiththeForeignCorrupt PracticesActof 1977). Itis
alsolegitimatetonegotiateamultilateral setof principleswithother countriesinthe
Organization for Economic Cooperation andDevelopment (OECD) with broadly
similar norms. Itmayalsobelegitimateto restrict imports fromacountry whose
labor practicesbroadsegmentsof thedomesticpopulation deemoffensive.But it is
not acceptabletounilaterallythreatenretaliationagainstother countriesbecausetheir
businesspracticesdonot complywithdomestic standards at home in order toforce
these countries to alter their own. standards. Usingclaimsof fairnesstoadvancecorn-
petitiveaimsiscoerciveandinherently contradictory. Tryingto "export" norms by
askingother countries to alter their social arrangements to match domestic onesis
inappropriate for thesamereason. [... ]
POLlTICAL GLOBALlZATION 1:THE DEMISEOF THE NATION-STATE? 230