Rodrik is a globalization skeptic in the line of Ha Joon Chang. He is not against globalization, but put the mantra of free markets into perspective. Rodrik spends a considerable part of his book on the history of globalization. He focuses on 2 periods of strong globalization. The first one, between 1820 and the First World War, the increase in global trade was based on imperialist policies, thereby forcing other countries to open their markets and accept unfavorable trade treaties (globalization by gunboat), and on the gold standard, which works fine as long as you don’t have a democracy to prevent the painful internal devaluations that are needed from time to time. The globalization drive after the second world war was based on the Bretton-Woods system and the General Agreement on Tariffs and Trade (GATT) within a multilateral world order, guaranteed by the US (dollar-exchange standard). These are the precursors to the World Trade Organisation (WTO), founded in 1995, but are based on different premises. Bretton-Woods and GATT respect the primacy of the nation-state limiting the reach of globalization where it creates conflicts with nation states. In contrast, the WTO aims towards hyperglobalization, even when it has negative consequences for nation states (e.g,, agriculture, food regulations, financial services) or undermines democratic decision-making within nation states. Recent economic success stories such as China and South Korea are due more to playing by the Bretton-Woods rules than WTO rules, relying on export subsidies, import tariffs and weak enforcement of intellectual property laws.
Rodrik sees a fundamental trilemma between globalization, nation states and democracy. You can have two, any two, but not all three. If you want globalization and democracy, you need global institutions, undermining the nation-state. If you want nation states and democracy, you can’t have deep globalization, as this requires global rules and creates the enormous capital flows that can undermine domestic economies.
Rodrik’s trilemma helps to gain insight in many current politics. Globalisation causes a power shift to the supranational level, often to non-democratic institutions (IMF, ECB, multinational companies, WTO). At the same time, many challenges remain deeply national, such as ageing populations, social safety, migration, inequality as a result of winner-takes-all markets. International mobility of goods and finance makes that nations tend to engage in races to the bottom (lowering taxes, standards) to attract investment and capital. Currently, globalisation and nation states seem to have the upper hand, eroding democracy. The power of electorates to significantly influence key economic and social decisions has become very limited, such is the disciplining force of international markets. The rise of populist parties and Brexit are consequences of this democratic erosion. Rodrik does not consider global democratic institutions realistic and therefore pleads for returning to nation states more power to set their economic and social policies within a set of global “traffic rules”, such as keeping trade imbalances in check. This would require scattering some sand in the wheels of international finance, like a financial transactions tax.
For developing countries, the situation is even more dire. Globalization has a tendency to “freeze” a country’s role in the international division of labor. In a globalized world, countries that live from exporting resources have little incentives to diversify and invest in representative institutions and education level of their population. Secondly, within the WTO system, many industrial policies that were used by developed countries are no longer allowed, such as protection of domestic industries, export subsidies, capital controls, currency devaluations and weak enforcement of intellectual property. Rodrik reminds us of the fact that the USA and the UK were notable protectionists until their industries were strong enough to stand on their own feet. Thirdly, manufacturing as a powerful driver of economic development for low-income countries may have run its course.
Manufacturing became a powerful driver of economic development for low-income countries for three reasons. First, it was relatively easy to absorb technology from abroad and generate high-productivity jobs. Second, manufacturing jobs did not require highly skill: farmers could be turned into production workers in factories with little investment in additional training. And, third, manufacturing demand was not constrained by low domestic incomes: production could expand through exports. But manufacturing has become increasingly skill-intensive which has made it very difficult for newcomers to break into world markets for manufacturing.