Balance of Trade

HKS Magazine | Winter 2017 Balance of Trade
Research

Balance of Trade

By Robert Kuttner

Illustrations by John Weber

THERE ARE ECONOMISTS who teach the well-known postulate that free trade improves global well-being. There are other social scientists and popular critics who contend that laissez-faire trade can be bad for equality, for social stability, and even for economic efficiency, just as pure laissez-faire is not optimal at home.

And then there is Dani Rodrik.

Rodrik, the Ford Foundation Professor of International Political Economy at the Kennedy School, is close to a unique specimen in the field of economics. He is a respectful critic of some of the most cherished suppositions of his profession, notably in his books and articles expressing qualms about globalization. But Rodrik does it as a superb technical economist, with humility, precision, wit, intellectual curiosity, and an astonishing range of reading across disciplines.

A few other social scientists have pursued a broad interdisciplinary approach. One of Rodrik’s heroes, the economist and philosopher Albert Hirschman was fond of calling himself a disciplinary “trespasser.” Rodrik, however, also publishes extensive quantitative work in the most prestigious refereed economics journals. All this makes him unusual, and makes his gentle heresies well grounded in both theory and evidence, and impossible to dismiss out of hand.

Rodrik came to wide attention in 1997, when he was still in his 30s, with a short book titled Has Globalization Gone Too Far? The tentative title, suggesting cautious inquiry, was classic Rodrik. At the time, the all but universal view among economists was the more globalization, the better. One of the core precepts in economics is the idea of comparative advantage, dating back to David Ricardo in 1817: Open trade allows each country to do what it does best, increasing general efficiency.

Rodrik basically agreed, but he felt that what he later called “deep globalization” could be too much of a good thing. The intensification of globalization, he wrote, created several problems that economists looking only at textbook efficiency tended to miss. “The most serious challenge for the world economy,” he wrote, is to ensure “that international economic integration does not contribute to domestic social disintegration.” (This was nearly two decades before the rise of the Tea Party and the anti-trade backlash.) On the basis of careful empirical work, Rodrik concluded that “globalization makes it difficult to sustain the postwar social bargain” of labor peace in exchange for “steadily improving worker pay and benefits.” That was a hard argument for many of his economist colleagues to swallow. In a free market, worker pay would (and should) reflect worker productivity—end of story.

But Rodrik pointed to two risks from excessive globalization—the conventional, oft-cited risk that the dislocations of globalization would lead to support for protectionism; and a second more serious risk—that globalization would tear societies apart, undermining democracy and widening inequality and social conflict. Rodrik complemented his economic analysis with a political one. He quoted political scientists who had observed that nations with open economies and extensive trade tended to have larger welfare states as social buffers against the dislocations of trade. “But once globalization moves beyond a certain point,” Rodrik wrote, “the government can no longer finance the necessary transfers because the tax base becomes too footloose.”

As notable as the book itself was who published it. The slim volume was commissioned by the Institute for International Economics, the citadel of the orthodox view of trade. C. Fred Bergsten the institute’s longtime director, observed some emerging cracks in the consensus view, and wanted his institute to be part of the debate; he also wanted a well-qualified economist to present the critique. Some of Bergsten’s colleagues and board members were appalled, but the book enriched the conversation and put Rodrik on a broader intellectual map.

Fourteen years later, in 2011, Rodrik published a grand synthesis of his view of trade, The Globalization Paradox, which many regard as his masterwork. The basic point: Markets and states are not adversaries—they need each other. The paradox of the title is that markets require states, but too much globalization undermines states, the repositories of political democracy, upholders of the law on which markets rest, and brokers of social contracts. He proposed what he called a “trilemma”: It is not possible to have deep globalization, political democracy, and a competent nation-state. At best, we can have two out of three.

Rodrik’s remedy is to return to something like the more moderate globalization of the Bretton Woods era, and to allow nation-states more sovereignty to determine their own preferred course. “Countries have the right to protect their own social arrangements, regulations, and institutions,” Rodrik wrote. “That’s more important than squeezing out the last bit of purported efficiency gains from trade,” he argues.

Over two decades, Rodrik has had the professional satisfaction of being at the cutting edge of a dissenting view of trade that has now become entirely mainstream. “It’s very clear that the profession has moved in his direction,” says the Nobel laureate Joseph Stiglitz, who was one of Rodrik’s teachers at Princeton. “The institutional view at the IMF is now that capital controls are sensible, and industrial policy is now defended by the World Bank. Overall, he’s been proven right.” Indeed, the IMF’s Prakash Lounging recently wrote, referring to Rodrik’s 1997 work, “His skepticism about the benefits of unfettered flows of capital across national boundaries is now conventional wisdom.”

For a time, Rodrik occupied a lonely niche; now he has company. “Twenty years ago,” he recalls, “economists would tell me, ’Do you really want to say this in public—It will just feed the barbarians. Your arguments will be abused by protectionists.’ My answer was ’What makes you think there aren’t barbarians on the other side—multinationals abusing patents and taxes, banks pushing for too much speculation?’”

 

DANI RODRIK WAS BORN in Istanbul to a Sephardic Jewish family. Centuries ago, the family name was most likely a variation on Rodrigues. He attended an English-language high school, the celebrated Robert College—the oldest American-sponsored school abroad—where by his own account he was a “good but not outstanding student.” But he was good enough to be accepted by Harvard.

From Harvard College, where he majored in government, writing an undergraduate thesis comparing rural political mobilization in Egypt and Turkey, he went to the Woodrow Wilson School of Public & International Affairs at Princeton, expecting to get a degree in one of the other social sciences. But after getting an MPA, he decided to pursue a doctorate in economics. “My epiphany came at the library one day, when I held recent issues of the American Political Science Review (APSR) and American Economic Review (AER) side by side,” he observes. “I realized I would be able to read many of the articles in the APSR if I did a PhD in economics; but the AER would be completely inaccessible to me if I did a PhD in political science.”

His mentor and dissertation adviser was Avinash Dixit, one of the most respected and mainstream of trade economists, “a modeler’s modeler,” Rodrik recalls. Even though Rodrik later became known mainly for his applied work on economic development and on trade, his dissertation at Princeton was mostly theory, no data. “The only numbers in it were the page numbers,” he says. Yet his work persuasively demonstrated that some standard assumptions did not hold water.

After Princeton, Rodrik chose a position in 1985 at the Kennedy School, a congenial place to cross boundaries, he later noted—boundaries between economic theory and economic policy, and between economics and other social sciences. Except for short stints at Columbia and Princeton’s Institute for Advanced Study, he has been at the Kennedy School ever since.

A Rodrik signature is to follow where the data lead him, even when the result challenges his own preconceptions. Among economists, Rodrik is fairly indulgent of targeted government policy as a legitimate tool of development. Yet as a student of comparative institutions and a quantitative economist, he makes clear that what works in Taiwan doesn’t necessarily work in Argentina.

Rodrik has played against type working with his Kennedy School colleague Robert Lawrence on South Africa’s industrial policy, South Africa uses a system of tariffs to incentivize auto manufacturers to build factories there. Tariffs against imports are kept high; but for each car that an automaker builds in South Africa, it may import a second car tariff-free. That strategy has helped create a local auto industry and produced some manufacturing jobs, but Rodrik calculated that South African consumers pay the price in far more costly cars, and the gains go mainly to BMW and Mercedes.

“He crunched the numbers,” says Lawrence, whose own views on trade are somewhat more orthodox than Rodrik’s. “I was surprised and impressed. He held the policies to a higher economic standard.”

Lawrence says he’s learned from Rodrik that the utilitarian view that freer markets produce improved overall outcomes is not all that matters. Rodrik is fond of quoting the political philosopher Michael Walzer that some seemingly efficient forms of exchange are “blocked” in order to serve other values. We prohibit child labor at home, but by importing products made by children, we tolerate the practice via the back door of trade. “I never quite saw it,” Lawrence says, “until I heard Dani explain the concept of blocked exchanges.”

 

RODRIK'S CURRENT COURSES at the Kennedy School suggest both his intellectual range and his passion for technical economics. His course on economic development, co-taught with two colleagues, Asim Khwaja and Rohini Pande, compares theories of development with empirical studies and outcomes. The readings cut across economic history, theory, philosophy, quantitative analysis, and extensive case study. About 80 percent of the students are international. This is a core course for the Kennedy School’s MPA/ID (International Development) program, for which Rodrik was the longtime faculty chair. “I often intend to pop in for a few minutes just to see how the class is going,” says the program director, Carol Finney, “and I find myself staying because of the elegance of his lectures.”

Rodrik’s other class, a seminar titled “Ideas and Interests,” looks at a range of policy problems, drawing on literature from economics, political science, sociology, and history. One of Rodrik’s core beliefs is that ideas matter. “The ideas of a very few people, such as Keynes and Harry Dexter White, had immense influence on the architecture of postwar reconstruction,” he says. “And ideas also mattered in the reversal that came in the Reagan-Thatcher period.”

Rodrik’s most recent book, Economics Rules (a characteristic Rodrik pun), is a careful sorting out of what economics does well and not so well. It is a combination love letter to his profession and lover’s quarrel. “When models are used judiciously,” he writes, “they are a source of illumination. When used dogmatically, they lead to hubris and errors in policy.” Too many economists, he adds, “are in love with the math and forget its instrumental nature.” Yet Rodrik passionately defends economics against economist-bashers. Math can be used to excess, but it also has the great virtue of being transparent. When two well-known Harvard economists published an influential paper that turned out to have an important technical mistake, which was discovered by a humble graduate student, Rodrik took this as cause for celebration—not because it showed the hubris of economists but because it demonstrated the openness of the discipline. “Ultimately, what determines the standing of a piece of research is not the affiliation, status, or network of the author, but how well it stacks up to the research criteria of the profession itself,” he writes. “Because models enable the highlighting of error, anyone can do it.”

The book, written with grace and wit, is a compendium of cases in which the insights of economic analysis produced useful policy innovations—and other cases in which economists overreached. Rather than being a universal set of rules, Rodrik insists, the premises of economics are context-dependent. Economics Rules closes with two sets of 10 commandments, one for economists and the other for would-be critics of the discipline. Commandment no. 9 for economists: “Efficiency is not everything.” Commandment no. 8 for non-economists: “Economists don’t (all) worship markets, but they know better how they work than you do.”

One of the most often cited of Rodrik’s papers, published in 2000 by the National Bureau of Economic Research, was a study he did with a graduate student, Francisco Rodriguez, in which the two decided to take a deep look at five of the most influential papers that claimed large growth gains from trade liberalization. Reverse engineering the methodology of the papers, they found that many of the assumptions were flawed and the gains were seriously overstated. Rodrik was challenged by some, not on the quality of his research but on his motivations. Yet it is technical work of this caliber, combined with a clear love of his profession, that gives him the credibility to be taken seriously as a critic.

 

IN HIS SPARE TIME, Rodrik also got involved in some Turkish derring-do. His father-in-law is a retired four-star general, Çetin Dogan, who belongs to the generation of military leaders who view themselves as guardians of a secular, constitutional Turkey in the spirit of modern Turkey’s founder, Kemal Atatürk. (Rodrik’s wife is Pinar Dogan, lecturer in public policy at HKS.) In 2003, documents were published in a leading Istanbul daily accusing General Dogan of masterminding a foiled coup against the Islamist government led by (now President) Recep Tayyip Erdogan. The general and more than 200 supposed-conspirators were vilified in the media and eventually tried and sentenced to long prison terms. Supporters of the exiled cleric Fethullah Gülen, at the time a regime ally, were especially active in promoting the case against Dogan.

Rodrik and his wife became leaders of the movement to exonerate General Dogan and hundreds of other defendants. They showed the incriminating documents to be forgeries, and eventually, in 2014, Turkey’s constitutional court ordered Dogan and other officers freed. In the meantime, President Erdogan and Gülen had become sworn enemies, and this past July, Erdogan used a real attempted coup, allegedly organized by Gülen followers, to suspend civil liberties and purge dissenters. Dogan, long retired and vilified by Gülenists, was neither involved nor accused.

In the course of working to exonerate the general, Rodrik, whose first and last names are far from typically Turkish, encountered anti-Semitism and charges that he was working for Israel’s Mossad. “On my visits to Turkey,” he says, “people sometimes tell me how well I speak Turkish. I tell them that their Turkish is not so bad, either.”

Though Rodrik writes elegant prose in books intended for general readers as well as scholars (all the more remarkable since English is not his first language), he is not quite a celebrity public intellectual. Unlike better-known figures in his profession with similar crossover appeal, such as Paul Krugman, Rodrik has opted to devote almost all his attention to the academy, continuing scholarly work along with the occasional book written for a broader audience. Although he has worked extensively with governments in developing countries, he has not gotten involved in government or politics in the United States. By temperament, he is not a self-promoter. You will find numerous Rodrik articles and papers, but only very intermittent Rodrik blog posts. Since he teaches mostly MPA/IDs, Rodrik’s broader influence comes less in the form of a “Rodrik School” of economics than in the applied work of practitioners who look to him as a mentor.

Rodrik’s most notable awards, appropriately, are named for economic thinkers who pushed against the conventions of the profession. He received the Albert Hirschman Prize from the Social Science Research Council, and the Wassily Leontief Award from the Tufts Global Development and Environment Institute. But it seems that recognition and respect for heterodox thinkers like Rodrik is now becoming mainstream.

Robert Kuttner, HKS IOP 1979, is co-editor and co-founder of The American Prospect, a professor at Brandeis University’s Heller School, and author of 10 books.

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