Global Markets and Democracy (by Francesc Trillas)

In 2007 Dani Rodrik published “One Economics. Many Recipes”. A commentary of that book was requested to me more than one year ago and the delays in journal publication have conspired to make that review appear in print (forthcoming in Spanish in Revista de Historia Industrial) after the publication of a new book by the same author. The new book responds to many question marks that were raised in the previous commentary. Immediately after the 2007 book was published, the global financial crisis of 2008 exploded and one was left with the question of how that book would have changed if it had been published two years later. Now we have the answer, in the new 2011 book “The Globalization Paradox.”

In this book Rodrik presents his Globalization trilemma. He argues that it is impossible to have three things simultaneously: global integrated markets, national sovereignty and democracy. If we have two of them, we must sacrifice the other one. Greek citizens, among others, would clearly agree today. The author shows how international transactions restrict the margin of manoeuvre of national governments. One clear example is the race to the bottom in corporate taxation due to the threat of capital mobility, which prevents many national economies from reinforcing their welfare states. A similar topic is addressed in Europe by two important documents, the Monti Report and The Nordic Model, that try to find ways out of the trilemma for the specific case of European economies.

To reach this argument, the first part of the book is a history of globalization, from the chartered trading companies (such as the East India Company) of the mercantilist era to the demise of the Bretton Woods system. The description of the transaction costs reduction role of merchant companies reminds one of Holmstrom’s 1999 article “The Firm as a Subeconomy,” where it is argued that many firms' executives, even today, act as regulators of the transactions that happen inside their organizations. According to Rodrik, in the past firms promoted by European states assumed roles that today are carried out by the states.

Rodrik shows that markets have always needed an institutional infrastructure, as Bowles impressive 2004 book “Microeconomics” also shows.

The second part of the book is devoted to criticizing the state of affairs after the crisis of the Bretton Woods system some thirty years ago. To Rodrik, the 2008 financial crisis is just a natural consequence of the excessive deregulation of international flows that followed that reasonable system. Global governance lags today behind global markets integration. Rodrik’s contribution consists of arguing that trying to advance global governance so as to correct for this mismatch is overambitious and not even desirable. He makes his own proposal of an international system that is based on national democratic sovereignty, with “traffic lights” that mostly respect what diverse democratic nation-states decide.

Pushing for additional integration would achieve marginal efficiency gains, which is not necessarily desirable taking into account that too often efficiency gains from international integration go hand in hand with huge distribution effects. It is not always desirable to win one on average if the rich win 51 and the poor lose 50.

A particularly brilliant part of the author’s argument is the criticism of the typical reasoning by economists that many of the difficulties of global governance should be fixed by depoliticised technocrats. If the choice is between depoliticization or democracy, the latter is more legitimate and a better route to a sustainable state of affairs. This connects with an important literature on the convenience of independent regulatory institutions.

Many European societies (where even the notion of the nation-state is fuzzy) will probably not find solutions in this book, but they will find useful principles (democracy, distribution) that will help them evolve towards a better combination of markets and governance.