SIEMENS

Does globalization benefit developing and emerging countries?

Rodrik: There are a few examples where globalization has coincided with a spectacular rise in wealth and living standards. In particular over the course of the last ten years emerging and developing countries grew much more rapidly than was the case in industrialized countries. China and India have done extremely well. But the picture is highly varied and differs greatly among individual countries. Over the last 25 years, for example, Africa and Latin America have benefitted much less than other regions from globalization.

What makes the difference between countries that benefit from globalization and those that do not?

Rodrik: One thing that successful emerging countries do well is establishing conditions in which modern manufacturing flourishes. China did it. Korea and Japan had done it before, and all three countries were very successful. Manufacturing generates highly productive labor — with relatively well-paid jobs — fosters private investment and leads to a diversification of the economy. The trick is to get a toehold in manufacturing industries and systematically to expand domestic employment in them. I call them automatic-convergence industries, because they close the income gap with rich countries. Get these industries on track, make an economy’s resources flow toward them — and the rest follows by itself. This really amounts to an automatic escalator up. By the same token, countries that rely solely on agriculture and resource production miss out. Africa is a particularly dismal example of this.

Get on the escalator and get rich? Is it as easy as that?

Rodrik: Well, the bad news is that this is not easy to accomplish — there is no cook book of standard recipes. It would be nice if governments simply had to stabilize, liberalize, and open up, and markets would do the rest. The reality is rather different. Getting it right requires active policy interventions on the part of emerging economies. In many cases these include close cooperation between government and businesses, direct and indirect subsidies, as well as keeping the currency hypercompetitive to stimulate the export industry.

Aren’t such interventions against the spirit of economic globalization?

Rodrik: One of the paradoxes of the last two decades of globalization is that its biggest beneficiaries have been those countries that have flouted its rules. They benefited from easy access to foreign markets but at the same time exerted active and sometimes interventionist control over their own financial systems, capital flows and currencies. Direct state interference and industrial policy measures have also reaped rewards for these countries in many cases.

Is this strategy any kind of guarantee of success for emerging economies over the coming years?

Rodrik: I doubt that this game can continue in its present form. Rich countries are ever less willing to accept such policies. And countries that hope to jump on the manufacturing bandwagon might be too late. Asian countries have built up huge capacity and high efficiencies that make it ever more difficult for newcomers to be competitive. And the financial and economic crisis does not make the life of developing countries easier either. Take the example of Turkey. While the country has strong potential in the long run, it currently has an unsustainable external deficit and will have to undergo a transition away from a borrowing-led model of growth. Catching up for emerging economies will not be impossible going forward, but it may be significantly harder to achieve.

What does this mean for globalization on the whole?

Rodrik: Globalization today is different from globalization 20 years ago, and it keeps changing its face. We are now starting to understand the downside of insufficiently tamed globalization; for example the havoc it can wreak in financial markets. The financial crisis has reminded us of one important lesson. Markets are wonderful but they need an occasional push from the state. Financial markets in particular are inherently unstable when they are on their own. So there is a growing willingness to give globalization better rules.

What rules would you propose for better management of globalization?

Rodrik: We need to regulate cross border capital flows much more intensely.

Switzerland and Brazil have already taken several cautious steps in that direction. The rules of the World Trade Organization should become more stringent; currently, for instance, they do not address manipulation of exchange rates appropriately. On the other hand, there are rules we should relax, such as those in the area of labor mobility. Great talent should be able to move more freely across borders. Limited liberalization in this area would create huge economic benefits by allowing people to employ their skills wherever they are used most efficiently.

In your opinion, will capitalism as the dominant economic system change its face, too?

Rodrik: It already is changing its face. There are many different streams of capitalism. Some of them are more liberal, others are less so. And the one thing we know is that we are inevitably moving away from a purely liberal market-based model. Without a doubt there will be a stronger role for the state. The bad news is that with growing inequality more people will challenge capitalism on the whole, in spite of its inherent virtues. The financial crisis made it obvious that we have produced a mess in our global economy. But at the same time we are at a loss to figure out what features precisely the capitalist model of the future should have and what this means for globalization.

What is currently the greatest risk to the world economy as it strives to move forward?

Rodrik: One thing that deeply concerns me is inequality. There can be little doubt that inequality between and within countries simply keeps growing. On the whole, groups with high skills and wealth tend to do better, while blue collar workers tend to lose out. This trend is particularly strong in the most liberal market economies. It bothers me a lot, because it can affect the political climate and in some circumstances may give rise to populist and extremist policies.

If you had one million dollars to invest freely in any of the BRIC countries, where would you put it?

Rodrik: For now Brazil and India — two countries with great long-term prospects and stable, participatory political systems.