Populism and the Economics of Globalization

Journal of International Business Policy (2018) ª 2018 Academy of International Business All rights reserved 2522-0691/18 www.jibp.net Populism and the economics of globalization Dani Rodrik Abstract Populism may seem like it has come out of nowhere, but it has been on the rise John F. Kennedy School of Government, Harvard for a while. I argue that economic history and economic theory both provide University, Cambridge, MA 02138, USA ample grounds for anticipating that advanced stages of economic globalization would produce a political backlash. While the backlash may have been Correspondence: predictable, the specific form it took was less so. I distinguish between left-wing D Rodrik, John F. Kennedy School of and right-wing variants of populism, which differ with respect to the societal Government, Harvard University, cleavages that populist politicians highlight. The first has been predominant in Cambridge, MA 02138, USA Latin America, and the second in Europe. I argue that these different reactions e-mail: [email protected] are related to the relative salience of different types of globalization shocks. Journal of International Business Policy (2018). https://doi.org/10.1057/s42214-018-0001-4 Keywords: populism; globalization; Latin America; Europe INTRODUCTION ‘‘Populism’’ is a loose label that encompasses a diverse set of movements. The term originates from the late nineteenth century, when a coalition of farmers, workers, and miners in the US rallied against the Gold Standard and the Northeastern banking and finance establishment. Latin America has a long tradition of populism going back to the 1930s, and exemplified by Peronism. Today populism spans a wide gamut of political movements, including anti-euro and anti-immigrant parties in Europe, and Syriza and Podemos in Greece and Spain, respectively, Trump’s antitrade nativism in the US, the economic populism of Chavez in Latin America, and many others in between. What all these share is an antiestablishment orientation, a claim to speak for the people against the elites, opposition to liberal economics and globalization, and often (but not always) a penchant for authoritarian governance.1 I address two questions in this paper. First, what are the economic roots of populism? Second, what are the factors that affect the emergence of right- versus left-wing populism? It may seem like populism has come out of nowhere. But the populist backlash has been on the rise for a while, for at least a Received: 2 November 2017 decade or more (see Figure 1). More importantly, the backlash was Revised: 6 December 2017 perfectly predictable. I will focus in this paper on the economic Accepted: 8 December 2017 Populism and the economics of globalization Dani Rodrik and refugees. That is largely the story of advanced countries in Europe. On the other hand, it is easier to mobilize along income/social class lines when the globalization shock takes the form mainly of trade, finance, and foreign investment. That in turn is the case with southern Europe and Latin Amer- ica. The US, where arguably both types of shocks have become highly salient recently, has produced populists of both stripes (Bernie Sanders and Don- ald Trump). I argue that it is important to distinguish between the demand and supply sides of the rise in populism. The economic anxiety and distributional struggles exacerbated by globalization generate a Figure 1 The global rise of populism. Notes: see Appendix for base for populism, but do not necessarily determine sources and methods. its political orientation. The relative salience of available cleavages and the narratives provided by roots of populism, in particular the role of eco- populist leaders is what provides direction and nomic globalization. I do not claim that globaliza- content to the grievances. Overlooking this distinc- tion was the only force at play – nor necessarily tion can obscure the respective roles of economic even the most important one. Changes in technol- and cultural factors in driving populist politics. ogy, rise of winner-take-all markets, erosion of The outline of the paper is as follows. I first labor-market protections, and decline of norms discuss what economic theory and empirics have to restricting pay differentials all have played their say about the distributive consequences of trade part. These developments are not entirely indepen- liberalization (Trade and Redistribution section). In dent from globalization, insofar as they both light of that discussion, I turn to the economics and fostered globalization and were reinforced by it. politics of compensation (Compensation and But neither can they be reduced to it. Nevertheless, Safety Nets section). In the next section, I examine economic history and economic theory both give questions of fairness and distributive justice, which us strong reasons to believe that advanced stages of economists have generally stayed away from, but globalization are prone to populist backlash. I will are crucial to understand the populist backlash examine those reasons below. (Trade, Redistribution, and Fairness section). In The The populist backlash may have been pre- Perils of Financial Globalization section, I review dictable, but the specific form it took was less so. the consequences of financial globalization. The Populism comes in different versions. Here I will Political Economy of the Backlash section brings distinguish between left-wing and right-wing vari- the supply side of populism into the picture, ants of populism, which differ with respect to the discussing conditions under which right-wing and societal cleavages that populist politicians high- left-wing variants of populism are more likely to light and render salient.2 The US progressive thrive. Finally, I provide some concluding com- movement and most Latin American populism ments in Concluding Remarks section. took a left-wing form. Donald Trump and European populism today represent, with some instructive exceptions, the right-wing variant. A second ques- TRADE AND REDISTRIBUTION tion I address below is what accounts for the Why does globalization, in its many forms, cause emergence of right-wing versus left-wing variants political conflict? How does the intensity of the of opposition to globalization. conflict vary over time, depending on the stage of I will suggest that these different reactions are globalization, state of the business cycle, and other related to the forms in which globalization shocks factors? In view of the contentious history of the make themselves felt in society. It is easier for first era of globalization, what enabled the later populist politicians to mobilize along ethno-na- flowering after the Second World War? And how tional/cultural cleavages when the globalization similar (or dissimilar) is the current populist shock becomes salient in the form of immigration backlash? Journal of International Business Policy Populism and the economics of globalization Dani Rodrik To anyone familiar with the basic economics of unit costs are a weighted average of changes in trade and financial integration, the politically payments to each of the factors, where the weights contentious nature of globalization should not be (in perfect competition) are theP cost shares of each 3 a surprise. The workhorse models with which factor. In other words, c^ ¼ hiwî; where a ‘‘hat’’ international economists work tend to have strong denotes proportionalP changes, hi is the cost share of redistributive implications. In fact, the real puzzle is factor i, and hi ¼ 1: that the world economy could achieve such high Now consider what happens with trade liberal- levels of openness in recent decades and maintain ization. The effect of trade liberalization is to raise it for so long – a question I will pick up later. the domestic price of exportables relative to Start with trade theory. Models of trade and importables. Let the importable described above distribution are essentially exercises in tracing out be the numeraire, with price fixed at unity. We are the effects of price changes on the material well- interested in what happens to the returns of factors being of identifiable economic groups. One of the used in the importable. Since this good is the most remarkable theorems in economics is the numeraire, we have the equilibrium condition Stolper–Samuelson theorem (1941), which gener- c = u(w1, w2, …,wn) = 1, stating equality between ates very sharp distributional implications from price and unit cost (the zero-profit condition). As opening up to trade. Specifically, in a model with long as the good continues to be produced, this two goods and two factors of production, with full condition holds bothP before and after the liberal- intersectoral mobility of the factors, owners of one ization. Therefore, hiwî ¼ 0: Since the weighted of the two factors are made necessarily worse off sum of factor price changes add up to zero, there with the opening to trade. The factor which is used must be at least one factor of production, call it the intensively in the importable good must experience kth factor, such that w^k 0: (The inequality will be a decline in its real earnings. Note that the theorem strict when goods differ in their factor intensities.) establishes absolute losses, and not relative losses. Meanwhile, exportable prices have increased Note also that the result holds regardless of con- (p^[ 0), thanks to the liberalization. Hence, sumption preferences: there are losses to one group w^k 0\p^; and the return to the kth factor declines even if they spend most or even all of their budget in terms of both the importable and exportables, on the importable good (which gets cheaper in producing an unambiguous fall in real returns, relative terms), although the magnitude of the regardless of the budget shares of the two goods. losses is reduced. Applied with some amount of This is known as the magnification effect in trade hand-waving to the US economy, the result pre- theory and follows from the fact that factor price dicts that low-skilled workers are unambiguously changes must bracket price changes in neoclassical worse off as a result of trade liberalization.

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