• Jeffry Frieden

Jeffry FriedenJanuary 2020. GrowthPolicy’s Devjani Roy interview Jeffry Frieden, Chair of the Department of Government at Harvard and Stanfield Professor of International Peace, on globalization, the rise of populism, and the future of democracy. | Read more interviews like this one.

Related Links: Jeffry Frieden’s Harvard faculty pageGlobal Capitalism: Its Fall and Rise in the Twentieth Century (W. W. Norton, 2006, 2020) | Currency Politics: The Political Economy of Exchange Rate Policy (Princeton University Press, 2015) | Twitter | Harvard Department of Government One of your most celebrated works, Global Capitalism: Its Fall and Rise in the Twentieth Century, will be going into its second edition in 2020. Broadly speaking, globalization has two stages: one spanning the late-nineteenth and early twentieth centuries, ending in 1914; and the second, beginning in the late-twentieth century. What, according to you, are the important differences between these two stages of globalization? Second, what are your predictions for the future of an open world economy as we enter a new decade?

Jeffry Frieden: The first age of globalization was the heyday of the classical gold standard. Governments largely gave priority to external balance, and to defending the gold parity (the exchange rate against gold), even if this meant imposing painful domestic austerity measures. Austerity was politically feasible because those who suffered most were politically powerless. Most leading countries had authoritarian or only partially representative governments: the working class, farmers, and much of the middle class were largely excluded from politics. By the 1920s, democracy had spread, labor unions and socialist parties were powerful, and it proved difficult or impossible for elites to impose the kinds of austerity measures that had been common in the classical era. Globalization Mark 1 failed because governments—elites, I suppose we would say—could not square the demands of economic openness with the demands of a democratic electorate. The second age of globalization grew out of attempts to overcome this tension. The leading governments in the West mapped out their vision for the international economy during and after World War II. They recognized that economic openness was unlikely to be achieved and sustained without a social safety net to protect people from the uncertainties of the world economy. They recognized that economic openness would create both winners and losers, and that socio-political stability required attending to the legitimate concerns of the losers. The result was a series of compromises between the desire for international economic integration, on the one hand, and domestic social and political pressures, on the other. The post-World War Two Western economies combined economic integration with the welfare state. This combination was quite stable for decades, but its stability is now in doubt. The big story this decade has been the upsurge in movements that combine hostility to existing elites with skepticism about economic and political integration. These “populist” movements have flourished in large part, I think, because governments have not in fact done enough to ensure that the benefits of globalization are more equitably distributed. And at this point I haven’t seen much evidence that those who would like to see globalization sustained and deepened have an answer to the concerns of their critics. Without that kind of answer, I think the initiative and momentum are with those who would like to see globalization rolled back or at least limited. In a recent research paper (co-authored with Chase Foster), you provide insights into the relationship between compensatory social spending and the appeal of populist politicians in seventeen western European countries, demonstrating that “where higher proportions of societal resources are provided for social services and cash transfers, populist parties receive smaller shares of the vote […].” What lessons does this hold for those of us interested in connections between voting patterns and the compensation hypothesis?

Jeffry Frieden: The “compensation hypothesis” is closely related to the points I just made [above] about the post-war compromise. As applied to globalization, it suggests that the political sustainability of economic openness depends on the extent to which governments compensate those who stand to lose from liberalization. If economic integration improves aggregate social welfare—makes the country as a whole better off—but harms some citizens, the losers should be compensated. This is not meant as an ethical or moral point (at least not usually—although it could be one) but a pragmatic one: if those harmed by openness are not adequately protected, they could become a powerful force against openness. In other words, compensation helps ensure social and political acceptance of the desirability of economic and political integration. The paper you cite, co-authored with Chase Foster, presents evidence that the compensation hypothesis is valid, at least in the western European countries we examine. Where governments have provided a broader and deeper social safety net, the populist nationalist backlash against European integration has been more limited. Where the safety net has been weaker, or where austerity measures have reduced the coverage of social policies, the populist upsurge has been more powerful. The evidence is at best suggestive and limited to western Europe. However, I think that it does provide some support for the idea that governments that more effectively protect those harmed by globalization or European integration face fewer populist challenges. Dani Rodrik has argued convincingly that compensation is not enough, and I agree. The problems associated with globalization and technological change require more long-term approaches, especially in developing more attractive opportunities for people and regions in distress. But I do think that appropriate social policies are an important part of any strategy to address the real concerns of large portions of our populations who have not benefited from economic integration and technological progress. My next question is on the future of democracy within the framework of globalization. Freedom House, a leading independent watchdog organization, has recorded global declines in political rights and civil liberties for the past thirteen years, noting in its latest report, “Social and economic changes related to globalization have contributed to a crisis in confidence in the political systems of long-standing democracies.” There was a time globalization was expected to use market forces efficiently to reallocate economic resources across borders. What is your sense on what has gone wrong? What must be done to right this ship?

Jeffry Frieden: The 1990s were the heyday of euphoria about globalization, and understandably so. The developing countries had largely abandoned their more protectionist policies and embraced economic openness; the Soviet Union had collapsed, and most of its successor states and former allies also seemed to have embraced globalization—along with China and Vietnam. And there was a widespread view that globalization would make societies both richer and more equal. Reality has, unfortunately, not cooperated with theory. It is certainly true that many countries have grown extremely rapidly—China being the most obvious case. However, even in countries that have grown rapidly, inequality has not been reduced and in many cases has grown. This is probably less of a problem in those countries that have indeed grown rapidly. But where growth has been slow, increased inequality has fed into discontent. Simple trade theory would of course predict that drawing hundreds of millions of low-wage unskilled and semi-skilled workers into the global labor force would put downward pressure on unskilled and semi-skilled wages in the developed world—and it has. But the growth in inequality goes beyond that. To take one example, wealth has become increasingly concentrated in the United States—something that affects not just unskilled and semi-skilled workers but the middle class. Today the richest 20 percent of American households owns 77 percent of the country’s wealth—more than three times that owned by the entire middle class (the middle 60 percent of households). Even more striking, the richest one percent of American households owns substantially more than the middle class combined. We can see this process regionally as well, as prosperous headquarters cities such as New York, Boston, and San Francisco get ever more prosperous while distressed regions fall farther behind. This is simply one example of the problem I pointed to before, where the gains from globalization and technological change have been highly concentrated both by region and by social group. There is no easy way to try to ensure that there is a more equitable—and more politically acceptable—distribution of the gains. Compensation certainly is not enough here; the longer-term policy has to be to make it easier for the private sector to create jobs in distressed regions, and to make it easier for people in those regions to gain the skills and capabilities to take those jobs. As an aside, I don’t see any necessary connection between the fact that “globalization was expected to use market forces efficiently to reallocate economic resources across borders” and its political impact. Economic efficiency is a good thing, and better than the alternative, but most of politics is about the distribution of the benefits of economic activity. To be sure, economic efficiency can increase the size of the pie to be divided, but most of the time most of the political action is about the size of the slices, not the size of the pie. You have written extensively on international trade policy. As of this writing, the U.S. has withdrawn from the TPP, engaged in a long-drawn-out trade war with China, renegotiated and renamed (the now-former) NAFTA, and chosen to exclude itself from the RCEP. In what ways do you believe U.S. trade policies of the past three years will impact the 2020 U.S. Presidential elections, especially given the critical electoral importance of the Industrial Belt states?

Jeffry Frieden: The 2016 presidential campaign was a watershed. For the first time in 75 years candidates for the nomination of both parties were explicitly hostile to international trade, finance, and investment. Bernie Sanders’ attitude toward globalization was not that different from Donald Trump’s. And during the campaign, we saw Hillary Clinton take more and more protectionist stances, culminating in her disavowing a treaty (TPP) that she herself had negotiated. The Trump administration has followed through on the candidate’s campaign promises with respect to trade. And the Democrats have hardly dared to disagree—indeed, some of them have accused Trump of being too soft on China. This indicates, I think, that there are powerful political pressures to pursue more protectionist policies. Certainly, there are also counter-forces. A lot of the business community is concerned about this turn in American trade policy, although their objections seem to have been muted by their enjoyment of corporate tax cuts and deregulation. And most Americans remain generally favorable to trade and globalization. However, as you say, many voters in the swing states of the industrial belt in the Midwest support protection, and that is a major reason why it appears to be a politically winning strategy. So I expect any Democratic nominee to continue to espouse mildly protectionist views. However, protectionist policies can take different forms. The Trump administration stands out from previous protectionists in its hostility to multilateralism, to the WTO, and generally to the international economic architecture and to cooperation with our traditional trading partners and allies. Democrats can, and may, separate themselves from the administration by supporting a renewed commitment to our allies and to the multilateral trade (and financial) regime that has largely prevailed since World War Two. Of course, the reality is that most Americans don’t really care much about trade or international economic relations. This is what gives added political clout to those—such as people in the industrial belt—who do support a more nationalistic and unilateral trade policy. And so I think protectionist tendencies will generally continue to dominate the debates. Populism, in an insidiously ignorant nativist incarnation, is on the rise, not merely in western liberal democracies but also in countries such as Brazil and India. As an economist who is also an economic historian, where do you see this trend heading? Does the ascendancy of populism tell us anything about the future of the welfare state, labor market policies, and social spending?

Jeffry Frieden: There are major differences between the populist movements in the developed West, those in central and eastern Europe, and those in the developing world. We can leave the latter two for another time; your question about how populism is likely to affect social and labor market policies is most pertinent for the western democracies. Most of the populist movements in western Europe—whether of the Right or of the Left—tend to support a maintenance of the welfare state. The right-wing populists typically want to restrict immigrants’ access to social benefits—what is often called “welfare chauvinism”—and both Right and Left are wary of the European Union in part because they see it as restricting national social policies they support. So they don’t directly challenge the welfare state. However, I am skeptical about the ability of the European populists to combine their anti-integrationist message and policies with a maintenance of the kinds of social and labor policies they say they support. More generally, I think many of the populists’ announced policy preferences are unrealistic, even unachievable. This could be disastrous if populists in government attempt unrealistic policies and fail. History suggests that when extremists fail to achieve their goals they don’t retreat, but rather double down with even more extreme policies. Whether populists are able to take power or not, I would hope that existing political parties (and elites) would take the rise of these movements as a powerful signal that they have to pay much more attention to people, regions, and problems that they have ignored. By the way, I’m actually a political scientist. I’ll assume that you meant calling me an economist and an economic historian to be a compliment, not an insult. What should we do about income inequality?

Jeffry Frieden: In our developed societies, much of the inequality is best thought of as regional rather than functional (by group or employment). Throughout the OECD many of the most important—and most politically volatile—social problems are in distressed areas. This is true of the U.S. where the industrial belt as well as many troubled rural areas have been struggling for decades. It’s also true of much of western Europe; indeed, maps of the regional patterns of support for populist parties match up well with maps of regions in economic distress. The most effective policies, then, are those that aim at places in trouble. Some such policies might include measures to: * improve primary and secondary education in these areas. * provide meaningful and affordable opportunities for technical and vocational training, and college education. * improve the economic and telecommunications infrastructures to ensure that troubled regions have full access to modern means of transportation, communication, and data transmission. * facilitate the creation of well-paying jobs in areas where shocking proportions of the able-bodied population have simply dropped out of the labor force because jobs simply don’t exist. * increase the supply of affordable housing in prosperous areas so that people can move to them without impoverishing themselves. It’s not very hard to think of things that will help distressed regions get out of their difficulties—after all, some declining industrial towns have bounced back. But it requires a serious commitment on the part of both central and local governments, as well as the private sector. How should we prevent the next financial crisis?

Jeffry Frieden: Serious and effective regulation of financial institutions, including those dealing in the “shadow banking” sector. Financial and macroeconomic policies to discourage the accumulation of debt (including public debt) for current consumption, and to encourage that what debt is accumulated goes to productive purposes.