Dani Rodrik on the Bretton Woods Compromise and Hyper-Globalization

Dani Rodrik is one of the leading economists who is critical of the Free Trade orthodoxy in economics. While Rodrik is very much in favor of countries pursuing an outward-focused and export-oriented strategy of growth (which sets him apart from non-economists who vehemently lambaste what they call the Neo-Liberal model or bias), he is critical of the view that nations need to fully and immediately embrace the policies promoted by Free Trade advocates.

Rodrik is a big fan of the Fox and Hedgehog metaphor and view the proponents of rapid and comprehensive trade liberalization, such as Jagdish Bhagwati, as hedgehogs promoting the big idea of Globalization. One manifestation of this big idea is the Washington Consensus which created a laundry list of domestic institutional changes that proponents argued were necessary for nations to implement if they wanted to grow. Rodrik characterizes this push to have nations conform to a rigid (and growing) set of policy guidelines as Hyper-Globalization.

Rodrik argues that this approach differs greatly from that used at the end of World War II under the Bretton Woods system. While the Bretton Woods conference is more closely associated with monetary policy, Rodrik views it as part of a broader international effort to open trade and promote global economic growth. In Rodrik's view, the key to the success of this approach was that it encouraged the growth of international trade without dictating that nations implement specific policies. This gave nations a good deal of policy space within which to craft their own unique policies and strategies for achieving the goals being promoted by the international community. He calls this approach the Bretton Woods Compromise and argues that it was very successful at achieving high levels of growth in domestic economies and international trade.

In contrast, Hyper-Globalization leaves very little policy space within which nations can craft their own growth strategies and pursue the policy goals they deem most important. Worst of all, adhering to the rigid requirements of Hyper-Globalization does not guarantee economic growth and in many cases has led to economic turmoil. So, where Thomas Friedman sees Globalization requiring nations to don a Golden Straitjacket, Rodrik argues that there is nothing golden about it.

Furthermore, Rodrik argues that, in the end, the Golden Straightjacket isn't much of a straightjacket either. That is to say, when push comes to shove, democratic leaders will respond to domestic political demands over international economic pressure or they will be replaced by other leaders who do so. Indeed, if leaders ignore domestic demands in favor of international ones, the democracy of the nation would be impaired.

Of course, national leaders do have to deal with conflicting demands from domestic and international sources.  Rodrik sees this conflict as part of a trilemma in the world economy. International integration (or globalization), nation states (or the preservation of their current role), and democratic politics (or the ability for populations to pursue their desired goals) create conflicting demands.

Rodrik argues that only two sets of demands can be reconciled at a time. Hyper-Globalization (or the Golden Straightjacket) satisfies the demands of international integration and the nation state, but does so at the expense of democracy. The Bretton Woods Compromise satisfied the demands of the nation state and democratic politics at the expense of international integration. Some sort of global federalism that allows democratic participation in setting the rules of international integration could satisfy the demands of democracy and international integration at the expense of diminishing the nation state's current role. However, Rodrik argues that, not only is the world a long way away from such a system, but it is unlikely that the diverse interests of developed and developing nations could be reconciled under one government.

Therefore, Rodrik argues that some sort of modified Bretton Woods Compromise is the best approach to managing the world economy. At Project Syndicate, Rodrik lays out seven principles that he thinks nations would agree to if they held a Bretton Woods type conference today. The essay is quite concise and worth reading in its entirety, but the seven principles are as follows :

1. Markets must be deeply embedded in systems of governance.
2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities.
3. Pluralist prosperity.
4. Countries have the right to protect their own regulations and institutions.
5. Countries have no right to impose their institutions on others.
6. International economic arrangements must establish rules for managing interaction among national institutions.
7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies.