Making Globalization More Development-Friendly Dani Rodrik November 2005

Paradoxes of globalization (I): Countries that have benefited most from globalization are those that have not played by the rules …

Paradoxes of globalization (I):... while those that have, have performed worse

Paradoxes of globalization (II): Financial globalization has produced frequent and painful crises… Source: Jeanne and Ranciere (2005)

Paradoxes of globalization (II): … and has forced countries to engage in costly strategies of self-insurance

Paradoxes of globalization (III): Areas of liberalization with the largest demonstrable gains barely get any attention Estimate of the welfare gains for developing countries: from a small relaxation in restrictions on temporary labor mobility: ~$80 bn (Winters) From complete elimination of all trade barriers in agriculture and manufactures: ~$22 bn (World Bank’s latest estimate)

Paradoxes of globalization (IV): Trade is hardly popular in advanced countries Reactions to the statement “imports should be restricted”

Paradoxes resolved (I) Institutional diversity across national settings is a source of transaction costs blocking deep integration… Despite disappearance of formal border barriers, border effects remain strong Missing trade Small net capital flows Trade: the role of regulatory & jurisdictional discontinuities –Borders are estimated to raise costs by around 40% Capital flows: problems of sovereign risk, moral hazard, and absence of ILLR –Do not exist (or greatly alleviated) within nations –Result in financial instability internationally

Paradoxes resolved (II) … moreover, institutional diversity is desirable, making deep economic integration an unattainable goal Universal institutional functions do not map into unique institutional designs –Security of property rights, market-based incentives, outward orientation, macroeconomic stability … can all be achieved in diverse institutional settings Institutional diversity is grounded in: –Differences in social preferences (over equity versus opportunity, for example) –Hysteresis and path dependence due to institutional clusters and complementarities (US versus Japan versus various European models) –Context specificity of desirable institutional arrangements to promote economic development

Paradoxes resolved (III) Domestic policies trump (nearly) everything else when it comes to economic growth A parable of two countries Country A … has preferential, free access to the US market for its exports … can send several millions of its citizens to the US as workers … receives huge volumes of direct investment … is totally plugged in to US production chains … for which the US Treasury stands ready to as lender of last resort … has effective security guarantee from the Us military Does globalization get better than this? Whereas B is a country for which … the US maintains a trade embargo, and does not have diplomatic relations … which receives neither aid nor any other kind of assistance … and which is kept outside international organizations like the WTO … which is prevented from borrowing from the IMF and WB. Which country did better?

Paradoxes resolved (IV) And development strategies require policy space to be successful From the Washington Consensus to a diagnostic approach –Different fixes for different countries “Binding constraints” differ –In practice, rapid growth episodes are the product of idiosyncratic determinants –Different constraints throw different diagnostic signals –Task: match policy priorities with diagnostics Desirable policy reforms can be heterodox –Dual-track pricing, TVEs, SEZs in China provided effective price incentives, security of “property rights, and outward orientation, but not in the standard way

By way of conclusion: 10 reforms that would make the world more conducive to development 1.A temporary work permit scheme that allows workers from developing nations to spend 3-5 years in the advanced countries. (Revolving pool of workers; low and high skill; return important) 2.A multilateral agreement that bans the subsidization of DFI. (The only significant form of industrial policy that (a) is not banned; and (b) clearly transfers resources from developing to developed countries.) 3.A “development box” in the WTO that legitimizes the use of trade and industrial incentives (including export subsidies) for developmental purposes (with burden of proof on those that argue the intervention is not developmental.) 4.Willingness to share information with LDC governments on Northern bank accounts held by LDC residents. 5.A 0.10% financial transaction tax on foreign currency transactions, with proceeds spent on global public goods.

By way of conclusion: 10 reforms that would make the world more conducive to development 6.A recognition by the US, in particular, that prudential restrictions on capital flows (“capital account management”) in the developing world is an integral part of a development agenda. 7.Adoption of the “odious debt” notion, whereby debt contracts signed by oppressive regimes are no longer enforceable in Northern courts. 8.Preparation of a “developmental impact statement” as a necessary requirement for any international agreement (including the costing out of the financial implications for LDCs, and laying out the modalities of how these will be financed). 9.Ending the monopoly of the World Bank in generating and disseminating policy ideas, particularly in the lowest income countries, by breaking it up into a number of competing agencies. 10.Moving the IMF’s Policy Development and Review (PDR) Department (and its staff) to a developing country, and rotating it in, say, among different African capitals every five years.