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Mari Megias:

Good day everyone. I am Mari Megias from the Office of Alumni Relations and Resource Development at Harvard Kennedy School and I’m very pleased to welcome you to this Wiener Conference Call. As we all continue to navigate the new normal brought on by the pandemic, the Kennedy School has increased opportunities for remote engagement. So watch your email for more invitations to learn from ����vlog���� faculty. Also, given that we are all working remotely, we’re running these calls a bit differently. So apologies for any issues we may experience.

Dani Rodrik is Ford Foundation Professor of International Political Economy at Harvard Kennedy School. He is published widely in the areas of economic development, international economics and political economy. His current research focuses on employment and economic growth, to both developing and advanced economies. We’re very fortunate that Dani is here today to share his expertise with our Kennedy School alumni and friends. Dani.

Dani Rodrik: 

Thank you, Mari, and I hope everyone who’s joined, and their loved ones are safe and will be so. Let me just lay out a few ideas and themes and then take questions. Subsequently, I should begin with the ... By making the obvious point that nobody really knows what’s going to happen after COVID-19. We’re in the midst of what looks like the deepest economic crisis since the Great Depression as well as a very severe public health challenge. And I think as we look ahead to what might happen in the world economy, we run the danger of trying to ... Of providing a prognosis that would fall easily prey to a kind of a confirmation bias and affirmation of our own worldview.

We may very easily see signs of a future economic and political order that aligns very closely with what we may have longed wished to see in the first place and that’s what I mean by confirmation bias. I’ll try to avoid that, but you will be the judge of how successful I have been. Let me start with what I think are going to be three fundamental post COVID trends. The first of those I would say would be a rebalancing between the role of the market and the role of the state with a much stronger state. I think the crisis has made evident the need for adequate state capacity to respond to crisis, to protect people as well as the inadequacy of markets and just competition on its own in responding to collective action problems.

I think that the specific indication of the United States that I think the crisis is going to elevate demands for more significant coverage in terms of health insurance, much stronger labor market protections including gig workers, demands for building up or protecting critical domestic supply chains and medical equipment and other industrial products. I think that’s some first big trend rebalancing of the market-state relationship in favor of the state. Second a retreat and obviously related to the first theme a retreat from hyperglobalization reassertion of the nation state that means bringing supply chains home, prioritizing domestic production, domestic employment, domestic finance, emphasizing resilience and dependability over minimizing costs or maximizing efficiency.

The third theme I would say that I think we’re likely to see a significant reversal in growth prospects for developing nations in particular. This is important because developing nations are coming off two decades or so of very strong growth. Developing countries as a whole, even if you leave out the East Asian countries had the best two decades since the ... Two decades after the Second World War. And the crisis they’re going to be facing is not just in terms of dealing with the public health challenge for which they have much weaker institutional capability obviously. But in addition to the kinds of shocks that developed countries are facing, developing countries are facing a number of very large external shocks in terms of sudden stop in capital flows, a significant reduction in remittances and tourism earnings and export receipts.

And developing countries have a very limited capacity to respond in particular the fiscal capacity is very limited unlike in the advanced countries where even central banks are encouraging a very strong fiscal response and saying, “This is not the time to worry about inflation or debt ratios into developing worlds.” The potential for resumption in inflation if fiscal expenditure rises significantly is a real threat. So three post COVID trends a stronger state retreat from hyper-globalization, significant reversal in the growth prospects for developing nations.

My second big point is to say that in fact, none of these trends are new. None of these trends are actually specifically created by COVID, they are simply what I would say intensification of pre-existing trend. So to return to the title of this presentation, I don’t think COVID is going to remake the world. I think it will simply speed up what has been an ongoing transformation. So let me say a couple of words about that. First, with respect to the market and state balance, I think we’re all aware that what many people have called the market fundamentalist or neoliberal consensus of the 1990s to 2000s has already largely dissipated. We are aware that inequality has become a very core concern even for centrists and for the right, and there’s greater recognition that market forces on their own are not adequate to address inequality and exclusion. We can see how much the nature of the conversation has changed about the role of the markets versus the state in the US, for example by noticing that even though Elizabeth Warren and Bernie Sanders have not made it to the nomination.

The most likely candidate Joe Biden, the only candidate, who was viewed as a centrist, is on almost every policy front. His ideas are much more to the left of what was on the agenda of the previous Democratic nominee, Hillary Clinton with respect to which was much more ambitious health insurance plans, much greater spending on green energy and climate change and much greater public funding for education. And I think as many have pointed out, Biden’s current set of policy prescriptions would be considered radical if they had been proposed by any previous Democratic presidential primary, and that already reflects how much the conversation on the market state balance has already moved.

With respect to the retreat from hyper-globalization, I think that was also evident. It was evident in the numbers, we might associate that retreat with the much more recent experience of Donald Trump’s flag waving on protectionism and the US-China trade war. But in fact it precedes that the numbers show that global value chains have been slowing down significantly in recent years. Trade buoyancy has been down which is that since 2008 international trade has stopped growing more rapidly than global GDP. And a very striking quantitative indicator of this decline in the expansion of world trade, is that in China, the export to GDP ratio has come down by a full 16 percentage points of GDP since 2006. It stood at around 36% exports of goods and services in relationship to GDP was around 36% in 2006 has come down already in 2018 to 20%. And of course, China’s export expansion was a big driver behind hyper-globalization until last quarter century. So the retreat from hyper-globalization also was a trend that was well had been set in motion before COVID.

And third, with respect to growth in the developing countries, I think even though that is perhaps a little bit less well recognized, the growth model in developing countries actually had already run its course in the last few years with growth coming down both in Latin America and in Sub-Saharan Africa in recent years. And that’s for the simple reason that this recent growth boom in those countries, both in the middle income countries in Latin America as well as the low income countries of Sub-Saharan Africa was based not on the sort of the most durable, sustainable kind of growth model that we know, which is industrialization in particular export oriented industrialization. But instead, these recent examples of growth boom were based on either commodity exports or on public investment drives neither of which is actually quite sustainable. So that growth had begun to come down and there was already again a trend that the COVID crisis is simply going to intensify rather than necessarily an agenda on its own.

The third and final big point that I want to make is that when we think about the consequences of these three big headline trends that I have identified, I don’t think we should think of them as inherently undesirable trends in and of themselves. And so far as the world economy was already on a sustainable, fragile path I think what has opened up for us is now a range of alternatives, some of which are pretty bad, but others are necessarily ... Or others are possibly necessary and desirable adjustments to what was a kind of unsustainable order.

And so therefore, whether we think these trends are on the whole a good thing or a bad thing we’re going to depend largely on how we choose to respond, how societies and governments will choose to respond. So again let me return to my sort of three big themes and expand a little bit about what I mean by that. With respect to the balance between state versus markets, I think the big question there is whether that the sort of the pro-state anti-market reaction is going to take a kind of an excessive reactive ad hoc state’s interventionism or will it take the form of a more inclusive sustainable balance between states and markets. And the question is, are we going to be able to put in place policy regimes that stimulate the creation of good jobs and to rebuilding of the middle class. And that’s going to take the kind of a partnership between states and businesses and other civil society actors and that’s going to require partnership and strategic cooperation, rather than hostility or returning back to our state versus markets kind of stale dichotomy.

So depending on the choices we make this reconsideration of the role of the state can be either negative or positive. With respect to globalization I think one can imagine a much more sensible globalization that in key respects fall short of hyper-globalization in its economic dimensions does not push nations to open up their borders to trade and investment to the same extent, gives them a lot more autonomy to devise their own rules and regulations without the pressure of flip lose capital. But that perhaps goes a third over in some other areas of globalization, which we have sorely neglected.

And of course the global public health area is not quite clearly one of those areas. We could have imagined, we could have built a globalization around public health issues around climate changes use, around labor rights issues with WHO or environmental agreements or ILO at the center of the global regime, instead we invested our political capital and building a globalization that is heavily economic in nature with the WTO or CDI, IMF as being the key organization the linchpins of that order. That has brought us a lot of good things but I think we pushed that system too far at the expense of the globalization that we needed to have in many other areas where there were too global public goods and there were severe problems of beggar-thy-neighbor.

And so the question there is whether we will move in the direction of that more sensible, more balanced globalization that balances economic considerations with considerations of the environment, health, social solidarity, labor rights, or are we going to get a kind of a senseless reactive protectionism and the focus on ethnonationalism and then looking at the world from the lens of us versus them. And [inaudible 00:17:16] because it’s a zero-sum game exclusively.

And very finally, with respect to growth strategies in developing nations I do think that growth rates will generally be much lower in the developing world even as the effects of the crisis wear out. But the silver lining may well be there that if this crisis makes policymakers in the developing world realize that they were on a growth model that was unsustainable, that if it pushes them to reorient their efforts in a direction that focuses much more on, and I would have to say here, it will have to be much more on the domestic economy and our services because I think exports of manufacturers in particular are very unlikely to play kind of the role of an engine going forward. And again, for reasons having to do with many trends, technological and other trends that pre-date the COVID crisis.

But I think the silver lining here is that there might be a much more realistic appraisal of growth prospects on developing country leaders. A real orientation towards the domestic economy and building wider strengths around services and the middle class. And because that’s ultimately what’s going to provide both employment and sustainable growth prospects in the developing world. It is going to be lower rate of growth, but unlike commodity exports over public investment-based exports, it might be one that’s easier to sustain. So again, to summarize and close I think COVID in many ways is intensifying and speeding up the pre-existing trends. I think that how this will play out depends largely on the choices that societies and governments are going to make. So it is not all gloom, we have agency and if we make right choices I think there are lots of useful terms that the world economy could take. So let me just stop here and I’ll be very happy to take your questions.

Q: Which multilateral institutions do you think will come out stronger and which weaker and why as a result of the pandemic?

Well, I would like to hope that what comes out much stronger are institutions that I named quickly in my talk. And those are the ones that are addressing true failures of global public goods. And those would be like the World Health Organization, stronger international environmental agreements, the International Labor Organization, which has really been sidelined for decades. And I think those would be the elements of a global regime that we really need to strengthen. And I do think that the elements of the world economy that ... The World Trade Organization, the OECD and even the IMF I think are going to come out weaker at the end of this.

Q: My question to you professor is that you just mentioned OECD and my question is really to follow up, how do you think the role of the OECD would be in terms of fiscal policy in the coming years?

Thank you for the question. I think the OECD has been trying to transition into a mode where problems of social inclusion equity are much more prominent in discussions. The OECD I think for the last three or four decades has spearheaded a process of economic liberalization among its members and also for prospective members. For example, one of the requirements for membership in the OECD has long been openness, the absence of controls on the flow of international capital movements, including short term capital movements. So in order to become a member of the OECD in emerging market, or a middle income country would have to remove all controls on capital flows. Now, today, even the International Monetary Fund accepts that in the kind of world economy that we live and the volatility of international capital flows that capital controls might be a useful policy to a lot of countries.

So I see the OECD sort of moving away from its sort of hyper globalist view to one that is much more emphasizing the role of labor rights, labor standards, models of social and productive inclusion. And I think it remains to be seen how successful it’s going to be, but there’s certainly people in OECD who’s trying to transition the organization in that direction.

Q: My focus has been on the labor issues. You’ve mentioned the ILO a number of times, what do you think would be the priority issues for a rethink of the ILO and specifically, would you think that an idea like a global minimum wage would be helpful?

I’m not a fan of global minimum wage but I would be very much in favor of making the core international labor standards a much more significant global norm. Now, to the point where we make adherence to those core ILO labor standards a precondition for signing trade agreements. And I realized that since the United States hasn’t signed some of those core labor standards and core labor conventions that would leave the US out. But it should be an aspiration for the US as well. And I think actually that was clearly stated by ... But it was part of Elizabeth Warren’s plan that this has to be an aspiration for the US.

So I think realistically, much of the work that needs to be done to improve the working conditions of labor and the bargaining power and the voice of labor in much of that I think I would say 80% of that work has to be done within nations. There’s very limited that international organizations can do. But I think they can help in terms of developing certain norms, certain expectations, and I think that’s what I would hope that the ILO would be elevated in terms of ... A kind of an international organization that people look up to and then take some of the conventions, ILO conventions and the norms that are being developed at the ILOs as aspirations to elevate their economies towards.

Just as I was mentioning a minute ago the requirement of not having any capital controls as one of the norms of the OECD having sort of subscribing to the core ILO Convention, which has enabling things like freedom of association, people collective bargaining no exploitation of labor, some requirements on child labor and so forth. But the global minimum wage I think is problematic in that so much goes into sort of what should be an appropriate wage not just even across countries, but even within nations that I’m not sure a global standard on that would be very helpful.

Q: I do agree with your three major points which are well taken. And as I suspect you know when General Mattis has made it very clear when he said, “You start to cut back on development funding, you better be prepared to spend more on bullets and arms.” My question comment to you, sir, is that notwithstanding what you’re saying and then with parochial political publics as the Americans or the United States is pulling back from international engagement and my country is very well versed in terms of rhetoric’s, but we lack what is called the systemic essential funding or the bottom in terms of walking the talk. And as such, there are many vulnerable nations now that are hanging by a thread. And I would like to say that common sense dictates but also rigorous insights in terms of investigation states that poverty and unemployment are probably the two essential drivers’ vectors resulting in violence. And violence when uncontained tends to migrate, resulting in also ecological as well as economic collapse. What would you suggest if you were the advisor to the next president of the United States in terms of what he should be doing in the next 12 months? I thank you, sir.

Yeah. Thank you very much for your question and comment. And I agree about the importance of development funding, but on the part of the international community. And I think that this point in particular, this is a huge issue given the magnitude of the problem that developing countries are facing. I mean it’s hard enough in the advanced countries, but in the United States today, even the Fed is saying, “Don’t worry about fiscal deficits just go and spend and we will do whatever it takes in terms of the expanding credit.” Because nobody’s really worried about inflation in the advanced countries like United. And nobody’s worried about inflation is because there is a significant increase in saving and resources and financial markets are very deep both in the US and the advanced countries.

And those resources are also augmented by sort of flows returning, leaving the developing world and coming back into the advanced countries. And to the support the poor c