Dani Rodrik: The Future of Developing Countries and Globalization After the Pandemic

Harvard Kennedy School economist Dani Rodrik talks to Rob about the importance of putting debt payments by developing countries on hold in the face of the pandemic. They also discuss the state of globalization and the US-China relationship.


Rob Johnson:

I’m here today with Dani Rodrik. He’s the Ford Professor of International Political Economy at the Harvard Kennedy School. He’s the Co-director of Economics for Inclusive Prosperity. He’s the President Elect of the International Economic Association. I’m glad to say he’s the Commissioner on the Commission for Global Economic Transformation that’s co-chaired by Mike Spence and Joseph Stiglitz under the aegis of the Institute for New Economic Thinking.

Dani, thanks for joining me today.

Dani Rodrik:

You’re very welcome, Rob. It’s always great to talk to you.

Rob Johnson:

We speak now here just on the first of May at a time when the pandemic has captured the attention of the entire world and created a very stressful and difficult transformation. I think we all have a responsibility to try to help things evolve, to recognize what’s going well, to recognize what’s failing, to see it in the context of the political economy that your work has focused on, going back to the time we were graduate students together at Princeton University.

How do you see what the pandemic has done to the world, to the ideas, to the trends that were in motion? I guess, we’ll get into your thoughts on who’s doing things the right way that we should emulate and maybe what’s missing that you would like to encourage people to embrace.

Dani Rodrik:

Yes. Thank you, Rob. I don’t think the pandemic fundamentally changes our world. I think it just accelerates many of the trends that were already in place and perhaps helps us see those trends in a clearer fashion than before. I think one clear trend is that the balance between the market and the state is clearly moving now away from the market. I think there is much greater understanding of the role that the state has to provide in terms of providing better access to health, certainly in the United States, greater social insurance, more assistance into the productive sphere of the economy, much greater capacity of the state to respond to crises and protect people, and address economic inequality and economic insecurity broadly. This is not something that markets do a good job of on their own.

I think one clear trend is the rebalancing of the market and the state, but this was very much, I think, a trend that was in evidence. The neoliberal and market fundamentalist conception of the role of policy that was already dying a long death, but this, I think, just highlights this trend.

I think similarly, there’s a rebalancing going on between the nation state and globalization. I think there is a retreat from hyper-globalization that COVID-19 is going to retrench and accelerate, but, again, this was something that was already happening. Supply chains were coming back home way before Trump started to wave the trade war flag against China. Trade as a whole had lost its buoyancy in relation to world output. Trade typically increased more than global GDP prior to the great financial crisis of 2008 and 2009. Since then, actually that has not been the case and China, which was a big force in terms of pushing for hyper-globalization, has essentially been turning inward. Exports to GDP have come down by 15 percentage points since about 2006 in China and that’s an ongoing trend that predates the US-China trade war. This, again, is something that was in place.

Third and finally I would say that I think the role of the developing countries, developing countries, low income and middle income countries in the world economy I think is going to undergo significant change in that developing countries did very well in the last few decades, grew at rates overall that were on average close to what the good couple of, two or three decades after the end of the second world war. That wasn’t just China and some Asian countries. Sub Saharan Africa did very well. Latin America in general did very well.

We might get into some of the difficulties, the immediate difficulties they’re facing right now, but there is something that I think is going to be very clear, that their underlying growth model is also very much under threat and I think they’ll have to change their growth strategies. They have to adjust to the reality of much lower growth rates going forward with everything that that entails in terms of the difficulties of creating jobs for young population and so forth.

Again, this is something that was already happening. Growth in the developing world was coming down as many of the previous growth engines such as increases in domestic demand or increases in public investment or commodity prices which were your typical drivers of growth in low income and middle income countries in the last couple of decades, those were already losing their potency. Again, it’s an acceleration of pre-existing trends.

Rob Johnson:

Particularly in the emerging countries, the stress between providing for public health, providing for development, issues related to climate, are there global or international ways that we can band together to mitigate these acute pressures there? I know many people are talking about Africa right now and the, what you might call, initial conditions of an elderly government class of young population base that’s growing, a development strategy that you might say there are great potentials with technology but the past meaning a manufacturing infant industry approach is not likely to be precedent? Living near the equator where arable lands are destroyed by climate change and the distrust of authority.

I see many, many reports about the prospect of social unrest becoming very acute in Africa and probably in other developing countries. Is there an international response that you would envision?

Dani Rodrik:

Yes. Absolutely. I think what you’re saying about the developing world, especially the low income Africa, which has a very significant problem of creating jobs for a very young population in the urban areas. This is really going to be a major problem. Developing countries, I think, face a problem that’s orders of magnitude larger than what the advanced countries are facing because on top of the public health challenge, on top of the public health crisis, and we don’t exactly know the contours of that yet because it hasn’t fully played out in the developing world. These countries first don’t have the fiscal capacity to provide support to the workers, especially in the informal part of the economy that would very severely affected. On top, and this is really the big major difference from the advanced countries, they are being hit with a major external shock in terms of a sudden stopping of capital inflows, significant deterioration in terms of trade, reduction in remittances, reduction in tourism revenues and the magnitude of these are relative to the GDPs of the developing countries are very, very large.

Returning to your essential question of what can the international community do, I think so far very, very little has been done. Of course the IMF and the World Bank have made credit lines available and there’s been some action on giving low income countries some breathing space on their sovereign debt to creditor governments. That’s a very, very small part of the problem.

We need a much larger scale standstill on debt service to the creditors of developing nations that should cover all sovereign debt service and that should be sanctioned by the G20 and multilateral institutions. Patrick Bolton at Colombia and co-authors have vested setting up a multi-laterally governed financial facility that would reroute sovereign debt service from the developing world to urgent public health and fiscal needs, domestically in those countries effectively making the money that would go to debt service to a foreign creditors both public, but in that case they suggested a public creditors, but I think it should also be applied to private creditors as well. The idea is to use those resources that would otherwise go to creditors in the developed world to make those resources available for urgent public health and economic needs in the developing world.

That, I think, is really where action is needed. There has not been, despite some proposals, there has not been an expanded SDR allocation, special drawing rights, to increase multilateral liquidity for developing countries. I think some people also have recommended, and I agree with them, that there should be multilaterally sanctioned capital controls, which is to say give developing countries the option of preventing capital outflows, panic outflows in a way that would not stigmatize them because if the IMF or the G20 sanctions to use those capital controls it would be a way of avoiding stigma. Developing countries need to be engaged in strategies that will keep savings and finance at home to face up to these very fundamental needs and I think those are some of the elements that the advanced countries and the G20 can contribute both in terms of standstills on debt service, on SDR allocation, on sanctioning, the use of capital controls and those are just some of the things that I think are needed rather immediately to deal with the short term problem.

Then there is a more medium term and longer term issues which you are also talking about, which is what kind of recovery strategy, what kind of growth strategy will these countries have to pursue. That will have to be really seriously thought of as well and we can maybe return to that.

Rob Johnson:

In our work with the Commission on Global Economic Transformation, you and Joe Stiglitz together have placed the greatest emphasis on work related to one of the themes you cited earlier of the balance between the nation state and the structure of globalization. What do you see now? I think some of these tensions and contradictions, and you’ve written about it a great deal, were hiding in plain sight. They were quite evident. Does the onset of the pandemic underscore things and accelerate what you might call the redesign of that balance in ways that might not have been achievable otherwise?

Dani Rodrik:

At the very least I think the pandemic should make us much more aware of the wrong turns taken and the choices not made with respect to the type of globalization, the type of global order that we’ve tried to construct. Whether that realization, and I’ll say a little bit more about what I have in mind by that, but whether that realization results in the effective construction of an alternative, more productive global order, I think is harder to imagine because we’re going to go into a period where I think the willingness to invest in international institutions and new global regimes are not going to be that strong. I don’t see a lot of action but I see at least us making progress on our understanding of what the fundamental problems are.

Dani Rodrik:

Let me just say a couple of words about that. I think for too long we have imagined globalization as something that just falls onto our laps in a ready made packaged kind of a version as if we have absolutely no control over it. In fact, every system of globalization is underpinned by rules and regulations that we write, whether it’s in the rules of the IMF or in the rules of the WTO or the European Union or the trade agreements that we sign, or they’re internalized through norms of good behavior such as the norm that countries should let finance flow across borders.

The question therefore becomes, where do we want to invest in building rules and developing norms and where are areas of priority? I think after the 1990s especially, with a push inordinately on developing regimes that would accelerate the integration of markets in goods, many services and also finance and capital and we’ve neglected on the one hand, I think, in a lot of areas, we’ve gone way too far. Also, we’ve neglected areas where the argument for building global regimes and investing in global rules are much more desirable.

For example, global public health is a true global public good, investing in a joint information share in treatment vaccine development, developing joint strategies, that’s a true global public good and it’s an area which demanded a lot of attention and investment of political capital, yet the WHO, of course, became a rather secondary institution that nobody paid much attention to. The requirement changed a new global regime, you don’t get a stronger one than in the case of climate change, and yet, of course, progress there has been very, very limited.

We could imagine globalizations where we had the WHO, international climate agreements or the ILO, thinking about labor standards and codes and norms about how we treat labor. We can envision globalizations that were centered on those kinds of institutions. Instead, we built a very different type of globalization that was centered on institutions that fostered deep economic integration even when it came at the cost of domestic social disintegration.

I’m hoping at least that it’ll become both clear that the type of globalization we created was a matter of choice and also that in some areas we have made decisively wrong decisions or put our efforts in the wrong direction.

As I said at the outset, I don’t see in the next few years a significant investment in building up, let’s say, global institutions in the area of labor, human rights, climate, environment or public health. I don’t think the political willingness to invest in global institutions in these new areas will be there. I think if we have the consciousness that that might … in our own domestic societies and policies, it might get domestic voters, consumers, civil society organizations pushing from the bottom up for the requisite kind of rebalancing internally, and I think that’s where we’re much more likely to get the change to happen.

Rob Johnson:

It’s fascinating, Dani, you have such a textured awareness about all of these things and at one level, we’ve had a globalization that was a little too disruptive and a little too much and then, on the other hand, there are global international collaborations that we haven’t done sufficiently. It’s not more or less. It’s a very complex redesign.

Dani Rodrik:

Absolutely. That’s I think … That’s why I think the debate between do we have too much globalization or too little globalization? Are you against globalization or pro globalization? I think this has been really a massive diversion from the kinds of issues that we need to be discussing. The only question is about getting the right level of globalization and different policy domain calls for different levels of globalization and in some areas we have gone too far. I would say that in the context of many of the WTO agreements on subsidies, on investment related measures and many aspects of trade agreements on intellectual property rights, rules with respect to capital account liberalization, we’ve gone way too far.

Even within economic globalization there are areas where I don’t think we’ve gone nearly far enough in trying to construct a global order, so one glaring area that we have been missing is addressing tax havens. That’s another area where, I think, it’s a very good economic argument for why we should have some common rules that prevent essentially beggar thy neighbor policies by very small jurisdictions being able to shift paper profits from paper headquarters for their jurisdictions at the expense of very large tax losses for other larger countries. This is a major source of revenue loss for a lot of countries, and the same is true for taxation of individual incomes where there’s a fundamental question about lack of information. Here is an area where I would say that globalization, even within the strictly economic domain, in terms of over tax co-operation, over rules with respect to tax havens where we have not gone nearly far enough.

Rob Johnson:

Yeah, I’m hearing the echo of the Panama Papers and I grew up in Detroit, Michigan. I was at a conference in Detroit when someone said to me, “Well, you’re one of these international economists who worked on Wall Street, et cetera. Why is it that wealthy people have made it legal to keep their money offshore and then they give us sermons about how we can’t afford the infrastructure, the public school systems, the pensions for the municipalities?” This was all during the time of the Detroit bankruptcy. It really is a dimension that has to be addressed. This is not a joke. This is very serious in relation to the ability to, not only create, but sustain adequate social infrastructure to underpin all the societies throughout the world.

Dani Rodrik:

Yeah. Absolutely. The damage that does is not that you are depriving the resources that could be used for public investment or providing for social insurance and spending on health and education. It’s also what it does to the sense of the nation as a whole. People thinking themselves as belonging to a collective.

Earlier I mentioned in passing that one of the paradoxical implications of hyper-globalization is that as it integrated domestic economies more tightly with each other, it actually resulted in a disintegration of domestic economies and societies. That’s because if you have large corporations and the super rich and the professional classes, once they start viewing themselves as part of this global network with neither the need nor the necessity to be part of their own local communities or to invest in those communities, on the one hand you’re drawing them away because they become these mythical global citizens. I say mythical because there’s obviously no true global citizenship. Global citizenship is just a way of saying that I’m part of this broader community, even though, of course, you are not paying any taxes to a global government. There are really no true obligations.

On the one hand you draw these classes and groups of individuals and corporations that are globally networked away from their societies and then left behind the middle and lower middle classes who don’t have access to those networks or the assets to prosper in a global economy. They’re also being left to withdraw into their own shell. That’s when you get, I think, a very ripe environment for a right wing populist movement to leverage that by drawing distinctions between a globalist elite and to true people and blaming foreigners, the immigrants and ethnic minorities for the problems of the lower and middle class. That’s essentially, I think, what’s been the strategy of the right.

Rob Johnson:

Yes, I know … I remember the late Samuel Huntington’s, one of his last essays was about Davos Man and that notion of being in the global network but not being responsible to the nation. I know lots of friends … I went to MIT as an undergraduate, and I studied a lot of arms control and disarmament. I know people in the National Security world who are very resentful of the technology firms that they feel that the National Security apparatus helped spawn. When they go out and sell to the highest bidder, they think any place in the world, they’ve accelerated the diffusion of technology that can be used against this country.

I see the work that Angus Deaton and Anne Case have done on the diseases of despair and at INET we funded a great deal of excellent, excellent research showing that the geography of the diseases of despair maps very closely with the geography of where the disruption related to automation, globalization, austere state and local budgets and climate increasingly take place, and this is the place where voting around the world for the Leave campaign, for the AFD, for Marine Le Pen, for Donald Trump takes place, so there is a distress and a stress in this architecture that’s feeding that despair and the politics that results from it that I think is quite haunting.

I remember David Goodhart in the UK wrote a book. I think it was called The Road to Somewhere where there were people who were from nowhere and there were people who wanted to be from somewhere, but their local communities were being shredded and destroyed and they didn’t have what you might call a faith in a future or a future for their children.

All of this echoes very much with me, Dani, growing up in Detroit in the aftermath of the civil rights and voting rights act. Democrats in the south could not support transfers to a Black led, Black majority northern city, and as the stresses of globalization affected the auto industry, the United States stood by and essentially blamed the victim and watched the rapid velocity and violent deterioration of Detroit. Even friends of my parents were very, very profoundly affected by depression; taking lots of drugs, becoming alcoholics and some suicide.

I was exposed to a very acute episode. You can see these strains and it seems to me that there is something about all being together, recognizing humanity that being part of a global network just can’t allow you to avoid that responsibility.

Dani Rodrik:

I think that’s very right and it raises the question of where has the left been because it’s very clear that the right, especially the authoritarian right, the Republican Party in the United States, way before Trump and more recently in Europe, various far right populist parties have been very good a capitalizing on the distress in the communities that have been left behind. That is partly economic. That is partly social, but capitalizing on them by pointing to outsiders, to foreigners, to immigrants, to religious or racial minorities.

The puzzle is where has the left been? Why has the left not been able to develop a program to respond to these economic and social ills and to these problems of despair, economic insecurity, lack of good jobs in the non major metropolitans of the countries that were not benefiting or falling behind.

I think part of the answer at least, I think, has been quite nicely identified by Thomas Piketty, who shows that essentially the center left parties, the Democratic Party in the United States and social democratic parties with Labor in the UK, increasingly became parties of the more educated elite and, as they became … They took on the policy agendas of the educated elite, which was maybe emphasize issues having to do with social liberalism but also take on the educated elite’s views that we live in this global economy and everybody has to adjust and essentially, as you say, blamed the victim so if jobs were going scarce the answer was for these people just to get a better education or to behave more responsibly, but that none of the problem was with the global economic regime that we had set up and very little of it was with the existing arrangements of government economic policy which was really falling behind in terms of responding to these problems.

I think perhaps we might say that there is now a bit of a correction there. I think we’ve seen the Bernie Sanders, Elizabeth Warren wing of the Democratic Party. There’s strong showing in the current primaries and even though Sanders did not win, it’s clear that even a centrist politician like Joe Biden, his plank is so much more to the left than anything in Hilary Clinton’s agenda four years ago.

I think there’s been some movement and if one wanted to be hopeful, that we will end up providing genuine remedies to these problems rather than wrapping them around issues of identity or racial exclusion that I think we might take heart in this slow movement in that direction in our politics.

Rob Johnson:

Where I see in light of the work you do on globalization and needing to collaborate on things like climate or health systems or what have you, I think the most acute danger of those forms of otherness pertains to the relationship between the United States and China. As you alerted us to earlier, the struggle, the deterioration of those relations related to trade and commerce and suspicions of one side and the other and the almost vulcanization of internet commerce platforms, it felt like we were on an unraveling or an increasingly polarized trajectory and yet, I think many of the things on the horizon beckon for turning that supertanker around and reinvigorating a cooperation between these two cultures that come from a very different philosophical traditions.

My friend, Orville Schell, who’s often reminded me that with the opium war and the Japanese invasion, there was a wound to the Chinese national identity and it is now coming into conflict like a tectonic plate with the American which you might call vision of having ruled the world since World War II and wanting people to fall in line into an American led system and not challenge for leadership.

All of these forces, all of these historic wounds, all of these philosophical differences perhaps fueled the fire of the disintegration of collaboration, or the deterioration of collaboration. How can we turn that supertanker around? Do you think it is a necessary part of restoring health and prosperity for the future of our planet?

Dani Rodrik:

Absolutely it is. I think the US-China relationship or the US-China economic conflict is one of the most visible aspects of the fragility of the post 1990 hyper-globalist construct because that construct was built on the assumption that countries would need their economic structures and their economic policies would need to become more and more similar as they integrated with each other deeply. This model of deep integration presumed that there was going to be convergence towards a similar model of how the economy is run and that model, of course, was more or less a western type of economic model. The idea was that China was moving in that direction and eventually would be a full member of the WTO under the rules of the WTO which does presume a significant amount of regulatory convergence with respect to rules on industrial policy, rules on managing your intellectual property rights regime, your state banks, your subsidies; those things would be pared down or pruned or eliminated to approximate more of a western kind of regime.

The conflict or the tension, of course, was and this was again in plain sight was that China had absolutely no reason to pursue that path because China has been the beneficiary of what is, from the western standpoint, a very unorthodox economic model that has worked very, very well. By the way, I should say it worked very well not just for itself, but for the rest of the world as well because the US and western investors or exporters would not have nearly as large a market as they do today even though they complain of restrictions. They would not have had nearly as large a market today in China if China had not managed to grow at 9-10% a year for three or more decades. They grew at those rates, not because they followed the advice of Washington economists, but because they precisely erected this very unorthodox mixed model that works very well for their purposes.

There’s really no reason to expect that the Chinese economic model is going to convert. The question becomes, what do you do? I think the answer is … I’d like to point to an analogy with the period of cold war between the United States and Soviet Union. What eventually prevented nuclear war, was the erection of some kind of a regime of peaceful coexistence. Once the Soviet Union realized that there was not going to be a Communist revolution in the United States. Once the United States realized that the Soviet Union was there to stay, then it became quite clear from the ’50s on that you had to have a regime that would accept differences and that these countries would need to coexist. Of course there were a lot of proxy wars. It wasn’t all very nice, but at least no Soviet Union and the United States did not get into a war with each other.

I think the analogy in the economic sphere for US and China is something similar and you might call it a model of peaceful economic coexistence, which is that the United States understands that China has its own model and therefore stops pushing China to change its policies towards its state enterprises, intellectual property rights, its subsidies, its regulations in a way that could conform to the US expectations about what an open economy is. By the same token, China understands that it does not have this permanent right to access the US market on hyper-globalist terms that the United States might also pursue its own social objectives with respect to protecting some labor markets or some communities. It might want to protect the integrity of its own education system and technologies and therefore have appropriate regulations that limits access to China when it is needed.

It’s not the end of globalization. In a way it’s a return to a more a GATT type regime in trade where we significantly lower our ambitions with respect to how much integration that we’re going to have. We understand that these countries have very different regimes and in some areas that there might not be a deep economic integration but as also the GATT regime, I think, showed us, it’s possible to have very high rates of expansion of trade and investment even when you have some barriers in place because of these differences in economic regimes. I think intellectually that’s the right way to go.

A few months ago we had a group of both American and Chinese economists and legal scholars put together a proposal around these lines that was arguing something along this and maybe once we get back to normal, some politicians will pick on that but I think that’s the way to go, some kind of a peaceful economic coexistence.

Rob Johnson:

I’d like to … Did you publish a report? I’d like to get that and be able to put that on the website in relation to this conversation.

Dani Rodrik:

Absolutely. I think we had a number of Nobelists including Joe Stiglitz who signed on and we have … I think it was both Chinese economists as well as US and western. I will definitely give you the link and send you the report.

Rob Johnson:

My own work, going back to when I was Soro’s fund management and ran the quantum emerging growth fund and really focused on what I’ll call non-Japan Asia after the dissolution of the ERM. I spent a lot of time in China and this is the years early ’90s, just after Tiananmen Square and have continued to do so. As this tension has built over the last few years, I’ve spent a lot of time, sometimes in conjunction with members of our global commission, Andrew Sheng, Mike Spence and I have spent a lot of time meeting over there.

I see a story that underscores many of the things you say. First, the Chinese never thought they were going to give up their unusual or mixed model over the relationship of state to the private sector that some foreign firms have found unsettling. Secondly, the Chinese probably did provoke the world a little bit where people are talking about comparative advantage and when they put down their marker, they’re called the 2025 Report, it had a lot to do with import substitution in knowledge intensive industries and I think many western, particularly American, firms had this belief that in a world of comparative advantage, our Silicon Valley and our people that made high level mechanical and robotic type structures would have a bigger export market. I think many American firms were frustrated where they would engage in foreign direct investment and suddenly see a competitor using the same methods spring up and start to make leaps and bounds in market share, leaving the foreign company, the American company who had brought a firm to their market, in the dust, shut out as though their methods had been stolen.

On the other side of the ledger and I’ve had lots of discussion with senior Chinese officials about this. They say to me that the scale of Chinese economy when integrated in the world would, without question, be disruptive, and yet they, the Chinese, have no power over the adjustment assistance redistributive policies of the United States that could have, as we talk about in the world of free trade, made everybody better off and no-one worse off. As they watched, they said what was happening was that the firms that were making lots of money from their foreign direct investments in China lobbied to keep their money offshore, lobbied to … I guess they felt that they lobbied to cut their own taxes and their own regulations and exacerbate the inequality in America.

This process led to a stress, say that someone like a Trump campaign and Dr. Navarro who worked with him, could show that there was a smoking gun, but the Chinese said, “There isn’t anything we could do.” That was a failure of Americans to protect other humans even in the world of transition of jobs. They wouldn’t protect jobs. They would protect people.

I see all of that stress bottling up when Wall Street, which is a place that I was close to, was always of the mind that we would reach convertibility and modernization of the Chinese market and US financial firms would provide their services on very large scale in China. When they maintain their capital controls and did not integrate and open their financial markets, even some frustration on Wall Street began to rise.

The political economy of power in the United States, and I guess there would be one more thing. The Chinese felt compelled to increase not only the compensation of their workers, but the protection of the environment in China. It made it a more costly place for American firms. In the realm of interests and political economy, there were a lot of wounds and there was nobody there defending the potential for gains in the future. As I said at the outset, the Chinese were not willing give up their different Chinese model of how to organize their internal society.

Maybe they had a faith that they could resort to scale economies given the size of their population, that the next engine of growth would be them moving up into a middle income and beyond level of development and that they could withdraw from the world. I don’t think we’ve gone that far but I heard all of these threads repeatedly in my explorations in China and even reading reports in recent years coming from the Council on Foreign Relations.

Dani Rodrik:

I think clearly one of the ongoing trends is the dissipation of these narratives of how more trade and more economic integration would necessarily push countries in a growth and economic liberal direction. Also, the expectation that it would push China to be more democratic, that was also the political side of the story that China was supposed to become more like “us” in terms of its political system as it became an export powerhouse and became part of the global economy.

I mean, again, we should have known that such an expectation was not necessarily justified. Now, I don’t think anybody believes that story anymore and the danger is that we react to that in a way that actually exacerbates the conflict rather than finds a way of managing it. That’s why I’m stressing the peaceful economic coexistence bit.

There’s unfortunately right now in the United States an alliance between the geopolitical hardliners who are worried about China’s rise as a military power and the economic protectionists who feel that China is not … I should say maybe the economic rather than protectionists because they want to be able to access China’s market but also keep China out of the west market bu that this alliance is essentially pushing towards a fortress America or much more aggressive posture vis a vis China that I don’t think is productive.

Now, I should say, none of this should make us in the west or in the US accept what I think are some genuine problems with human rights and political repression in China. I think we should always speak out about that but where we have no ability to directly pressure China to improve its human rights or repressive political practices, I think the circumstances dictate that we need to strive for a modus vivendi that maintains some of the benefits of trade and foreign investment rather than cuts them off and pushes us in a very different but equally unstable direction.

Rob Johnson:

Moving back including the relationship between the US and China, a lot of people have been talking about what the pandemic and what we’ve learned will affect the trajectory of climate change. Some have said exhaustion, disruption, use of fiscal capacity will retard the momentum that was developing towards addressing energy transformation. Others would argue and have argued that the unmasking of the inadequacy of the vision of unfettered free markets, the recognition of collection action of public goods brings things back to the fore.

I heard you say earlier in this conversation that the ability in these next few years to build big multilateral institutions with credibility. In the context of what we’ve just been talking about with the tension between the US and China, what kind of constructive response do you envision if we can’t build those big multilateral institutions? Do you see green shoots? Do you see the possibilities where constructive action will arise?

Dani Rodrik:

Yes. I’m not very hopeful in the short term about global or multilateral action but I do think that, in terms of the sequencing and the timing, that what’s likely to happen will happen at the national level or at the sub-national level first and only once we have a sufficient push from below, from national electorates and action of municipalities or states in this direction that we’re likely to get multilateral action to support these national or sub-national efforts. I think if I wanted to be optimistic, what I would say is that the green shoots that we’ll see will be political mobilization domestically around issues of climate. That is to say not just environmental activism, but activism around a set of issues that connect the climate with questions of social justice and good jobs.

I read the clamor for a green new deal both in the United States and in Europe somewhat in that kind of light, to say, “You cannot address our environmental challenges and climate change simply by targeting carbon taxes and reductions in emissions. This is not narrowly an environmental problem. I think we need a real of our economic policies that integrates economic policy and our productivist approaches, our employment and our innovation policies along with our environmental policies. I think the aftermath of the pandemic will be an environment where, I think, it’s easy to see that kind of mobilization becoming much stronger.

Dani Rodrik:

I think that’s the path that, if I wanted to be optimistic, I would say that that’s the kind of path that we might see that’s much more grassroots and builds on environmental activism in the broad sense of the word that has social justice and employment and good jobs dimensions added on to reorient economic policy in a way that’s really rebuilding the middle class and targeting economic insecurities, all the while, while reorienting the economy in a greener direction.

Rob Johnson:

I guess, Dani, in another realm and we’ve touched on it a little bit. With the need for people to rise to the challenge, with a sense that ideas are changing, the paradigm of Ronald Reagan in 1980 saying, “Government is the problem, not the solution,” is being challenged today by the insufficiency of public goods and collective underpinnings that are being revealed by this crisis.

Yet, the danger on the other side is sometimes people are a little too romantic about the capacities for governments to solve problems. What I see in the United States right now is a great deal of despondency where they’re not seeing it as the market versus the government, they’re seeing large corporations, wealthy individuals, concentrated wealth owning the government; that the government … It’s not discretionary moral collapse, it’s that government representatives need to raise so much money for public relations, for media, for field action to get elected, to maintain elections, to fight off primaries, what have you, that they’re all subject to a refraction of social design to satisfy their own needs for survival.

What concerns me, and we talked a little bit earlier about how the diseases of despair and the voting despair are changing government. I think one of the things that really experts like yourself and our global commission need to address is how to make government more responsive to inclusive and broad based prosperity. I do think the, what I will call, the commodificaton of social design is something that really has to come under the magnifying glass because I sense it’s been a very, very market contributor to the hollowing out of hope or faith in a prosperous society in future.

How do you see? You’ve studied the types of populism. You’ve studied the response of governance. I know you’re quite sensitive to economic history. How would you lead us out of this impasse, reform governments and reform the ideas that underpin the future Overton window, meaning the consensus of what would become a healthy conventional wisdom?

Dani Rodrik:

Yes. First, let me just say two points. One is really the importance of ideas because when we talk about the manner in which vested interest, large corporations, financial groups capture the government, we often think of this as a financial capture that they have through lobbying campaign contributions and other resources that they are able to control what the government does.

Actually I think a bigger capture is what I might call a narrative or cognitive capture which is capturing the story, being able to tell the story and that will make governments act in a way that furthers the interest of those groups. By and large the reason that we’ve reduced corporate taxes, and by and large the reason that the only way that governments can imagine how to bring jobs to certain depressed regions is by creating these opportunity zones where you’re providing huge tax breaks to corporations to benefit in terms of producing very few benefits in terms of jobs.

The reason that happens is not necessarily because these corporations are buying those policies in terms of low taxes or these incentive programs, it’s because governments, along with the rest of society, have bought into a particular narrative that that’s what good policy is. Good policy is lower taxation which is perfectly okay for corporations to be run for the benefit of their shareholders and if you want some corporation to act any differently, to create employment, you have to give them a whole lot of money to change their incentives.

I think number one is changing our narrative frame and thinking about corporations as a locally rooted, as dependent on the public goods that their governments provide without which they could not exist as a corporation. After all, corporation is a legal construct. It’s a privilege that the state provides an investor to protect those investment rights and historically it’s always been that that privilege is provided in return for some good that the corporation provides to society.

Early on it used to be that the corporation that the crown would create would generate wealth that it would share with the sovereign, with the crown. Later we developed this idea that the public interest went beyond the crown. It was society at large. The last few decades we completely forgot the quid pro quo and we just give corporations these privileges, not simply these legal protections and legal privileges, but also all the public infrastructure that they need access to, a trained workforce, access to a wide range of legal services, access to infrastructure, access to courts, access to innovation system and R&D spending on the part of the public sector. This is a natural thing but in return, corporations really don’t have to act as responsible citizens, don’t have to invest in local communities, invest in their suppliers, provide basic labor protections and treat their workers well.

Number one is really understanding that changing our basic narrative about what the private sector and corporations are. There’s some of that. I mean I think corporations, especially larger corporations, are increasingly aware that they are part of society, that they need to do something. This whole, what began simply as the marketing gimmick of corporate social responsibility has expanded and has taken a life of its own. I think we need to build on that consciousness, to have society engaged in redefining the purposes of the private sector and private corporations and not just the corporations themselves.

The second issue is how do you build the kinds of governance regimes which are going to appropriately focus on the right productive and innovation decisions that are going to benefit society at large so that innovation and technology and investment benefit society rather than society is asked to adapt to these supposedly exogenous God given changes which is our current narrative.

Here, I think there is … I’ll just point to some of the recent work that I’ve been doing with Chuck Sable at Columbia University. We have a paper that’s called Building A Good Jobs Economy, where we lay out a governance model that goes very much beyond the traditional state market or arms length model of regulation that economists are familiar with and develop a model of collaborate governance or iterative targets and monitoring to address things like increasing employment prospects, investing in good jobs where we need both the government and training institutions at community colleges and firms and civil society organizations to take part. There are lots of small scale examples of this already happening particularly with respect to workforce development and using community colleges to train disadvantaged youth and so forth.

It’s possible to do this on a much larger scale so models of this exist and they work best where it’s not simply government led but there’s also a lot of social capital, lots of civic investment in making these collaborative arrangements work. I think that’s the kind of model that can be extended and it goes significantly beyond this tradition of private/public kind of dichotomy. That’s the direction in which I see us going.

Rob Johnson:

Dani, like I mentioned earlier, I’ve known you since the time of graduate school and I’ve always admired how you both stay with the rigors that economics can provide to an understanding of a situation and yet you move to the boundaries and you explore the texture, the lateral pattern recognition, the deeper context in which society is framed and which society is embedded and structured. I think that the work that you’ve done and the work that you’re doing is a beacon now for people to be inspired by and to learn from, to reach into and in your collaborations to expand along with you. Sometimes, as the Chinese say, crisis is opportunity. I really think this is a time when you’re going to shine because I think you are very sensitive and shed light on the architectural challenges for the world, for various countries, for economic development that we need to really, really focus on and I find it very heartening to speak with you. I hope after a few months pass, perhaps we can get back together and continue to explore here on this podcast.

Dani Rodrik:

Thank you, Rob, and let me reciprocate by saying how much I appreciate the work that INET is doing in terms of being a hothouse of new and innovative ideas and changing economics also from within so we are in your debt as well.

Rob Johnson:

They always say that there are three parts of argument; thesis, antithesis, and synthesis. What I really like about your contribution to INET and to the world is that you’re not wallowing in antithesis, though very familiar with the critiques and contributing to them. You focus on the synthesis, on the way forward and on the way ahead. I think filling that void is perhaps the most important thing an expert can do. We didn’t spend a lot of time today talking about the deterioration of the faith and integrity of expertise, but I think when it is resurrected perhaps with the help of our natural scientists, epidemiologists and medical profession. When they tell that story, you’re going to be central to the resurrection of expertise in economics and in a reshaped and broader economics.

Thank you for your work and thank you for being here today.

Dani Rodrik:

Thank you, Rob. It was a pleasure.

Rob Johnson:

Bye bye.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.


About the Guest

DANI RODRIK is Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government at Harvard University. He was formerly the Albert O. Hirschman Professor of the Social Sciences at the Institute for Advanced Study in Princeton, New Jersey.