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AFA2 Book Review by Ian Verrender

Straight Talk on Trade: Ideas for a Sane World Economy
Dani Rodrik
Princeton University Press

“Are economists responsible for Donald Trump’s shocking victory in the US presidential election?” It hasn’t exactly been the question on everyone’s lips. But perhaps it should be.

This quote begins Dani Rodrik’s new book, Straight Talk on Trade. A demolition of contemporary economic thought and, in particular, the unrelenting push for a globalised economy, it builds on Rodrick’s previous work in challenging the dogmatic wisdom employed by most economists on everything from “free trade” to “structural reform.”

What makes the study such a withering critique is that he employs orthodox methodology and theory to dismantle and dismiss widely accepted beliefs about our long-term economic goals and how to achieve them.

He also employs another powerful tool long abandoned by most practitioners of the dismal science: common sense.

Economics is supposed to be a study of human behaviour. Yet for a large part of the past half-century, humanity, with all its failings, has been gradually exorcised from the discipline. On this analysis, the boom and bust cycle, so prevalent in financial markets, was not due to irrational behaviour; instead, in the theoretical and unflinching world of modern economic thought, over-regulation, controls and red tape created inefficiencies and imbalances. Those who have argued for fairness – for balance between capital and labour – or who have warned of the political dangers associated with an inequitable distribution of wealth have found themselves under attack.

In recent years, China’s transformation from third-world economic backwater to global industrial powerhouse only seemed to confirm the textbook argument that deregulation leads to a rising economic tide that lifts all boats. If removing some barriers had been so beneficial, why not get rid of them all? Or so the thinking evolved. Shades of grey were replaced by black and white in a world devoid of human foibles, where mathematical models, small government, deregulation and self-correcting markets ruled supreme.

Rodrik, Turkish-born and educated at Harvard and Princeton, has been one of the few dissenting voices – a role he has occupied for more than twenty years, starting with his 1997 tome, Has Globalization Gone Too Far? The political upheaval now coursing across the developed world – from Greece to Spain and Austria, to the United States, and to the United Kingdom’s stunning decision to leave the European Union – appears to answer that question. So where has it all gone wrong?

According to Rodrik, the answer is simple. It was the downgrading of the nation-state, the local community, as world leaders rushed to embrace what he calls hyperglobalisation, convincing themselves that it was an unstoppable force. Rodrik argues that global growth is best facilitated by strong liberal democratic nation-states acting in the best interests of their constituents rather than submitting to a fundamentalist doctrine of international economic integration. The problem, as he explains it, is that while markets are global, governments are not. Which leaves only two remedies: limit the global nature of markets or extend the reach of governance.

In recent decades, the world has opted for the latter. But if we’ve learnt anything from the global financial crisis, it is that transnational regulation and governance remain weak. This has allowed corporations and financiers to trample over nation-states, often leaving a trail of wreckage in their path. (If a case study is required, one only needs to examine the grand European experiment: a single market and a single currency with a regional central bank, combined with national governments and fiscal policy. Economic integration without political integration.)

Our current dilemma is not new. As Rodrik points out, the first major push towards globalisation – from the late 1800s, when nations subjected themselves to the gold standard – ended in disaster, with the Great Depression and a political backlash that saw the rise of extreme political movements on the far right and left. It was the period after World War II, when the Bretton Woods Agreement put new controls on the free flow of capital, that global growth blossomed. And as Rodrik notes, China’s phenomenal growth was not achieved through slavish devotion to free-market dogma, but through a carefully selected and managed approach to achieving social and economic goals.

So, what of the future? Rodrik argues the current backlash may be necessary to help avoid the same political upheaval and threat to freedom and democracy that followed the Great Depression – a political circuit-breaker rather than a retreat on trade. However, this analysis comes with a warning: “The appeal of populists is that they give voice to the anger of the excluded. They offer a grand narrative as well as concrete, if misleading and often dangerous, solutions,” he writes.

Governments chose to allow the free flow of global capital. They allowed it to continue even after the global financial crisis. Rodrik argues that bold measures now are required to restrict these flows so that communities can reclaim control of their economic future. While it is an argument that until recently has been akin to economic heresy, Rodrik insists it is necessary for the survival of capitalism and free-market economies:

If one lesson of history is the danger of globalization running amok, another is the malleability of capitalism. It was the New Deal, the welfare state, and controlled globalization . . . that eventually gave market-oriented societies a new lease on life and produced the postwar boom. It was not tinkering and minor modification of existing policies that produced these achievements but rather radical institutional engineering.

For Rodrik, it’s time for economists to be less dogmatic and to point out the pitfalls and dangers of policies – rather than simply barrelling blindly down the path of least resistance, otherwise known as conventional wisdom.

Ian Verrender

This review was published in AFA2 – Trump in Asia: The New World Disorder. To read this issue, subscribe or buy the issue.