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Why globalisation is failing, and what to do about it

Dan Trefler, the Douglas and Ruth Grant Canada Research Chair in Competitiveness and Prosperity, shares his thoughts on globalization failure

By Karen Christensen
Published: May 4, 2015

Q. You have been a forceful advocate for globalization, yet you also believe that in many ways, it isn’t working. Please explain.
I have long argued that Canada’s international trade agreements have made us a more competitive and more prosperous nation. That’s a hard fact, and I invite naysayers to show that my decade-long study of 10,000 Canadian firms shows otherwise. As a result I am pushing hard on the Canadian government to continue its initiatives for deeper integration with our American, European and Asian partners.

But only an ideologue could ignore the hard fact that globalization is not working—or not working as well as it could. For example, it has produced bad results in a number of African countries, and even where it is working, outcomes could have been much better. It did not work, for instance, for the Chinese workers who committed suicide rather than build iPhones; and it did not work for the 1,129 workers who perished in the Rana Plaza collapse.

It is no longer working as well for rich countries, either. We are now seeing a boomerang effect, where the developed countries that pushed for globalization are becoming its victims. An outpouring of new academic research—including my own—suggests that globalization is leaving the middle class behind.  That doesn’t mean we should abandon globalization. It is inarguably an important driver of rising living standards worldwide; but we need to do better at managing its downsides.

Q. In many countries, you believe economic elites use their incumbent position to rig the rules of the game. Please explain.
Within every successful society there is a yin-yang of two opposing forces: lined up on one side are the economic elites who have come to dominate mature industries and use their economic clout to further their narrow self interests: and on the other side are young entrepreneurs whose disruptive new ideas are raising productivity in new and exciting ways, creating high-paying jobs, and transforming the competitive landscape. In the richest countries, the latter—entrepreneurial dynamism—usually wins the day. But in the poorest countries—including much of Africa—the established elites are so powerful that entrepreneurship and innovation are suffocated.

Most countries lie in limbo between these two extremes. In countries like Mexico, home to telecom giant Carlos Slim (who surpassed Bill Gates last July as the world’s richest man), the economy is stuck in reverse as a result of huge inefficiencies in monopolized sectors such as telecom and energy. It is these in-limbo countries that I find most interesting. They suffer from what I call Yankee Syndrome. Here’s how it works:  each year, the best young talent in baseball is drafted by the weakest teams in Major League Baseball (MLB), in order to level out the playing field. But as everyone knows, the best talent always rises to the top, and is eventually snapped up by the New York Yankees—the most storied team in baseball, which has appeared in almost half of all World Series and won a quarter of them.

The Yankees are the ‘established elites’ of baseball, and like economic elites, they use their incumbent position to rig the rules of the game: so while every professional sport has a salary cap that levels the playing field, the Yankees grossly outspend the average team. This works great for the Yankees, but it doesn’t work for all the other teams—or their fans.

Yankee Syndrome is what happens in countries like Mexico, where Carlos Slim singlehandedly owns virtually the entire telecommunications industry. He uses his power to rig the rules of the game—in this case, by stifling all competition in his industry. This imposes a huge cost on society: the OECD has estimated that Carlos Slim alone reduces Mexican GDP by 1.8%.  This is why the economic elite in Mexico and other in-limbo countries is the greatest impediment to their future prosperity.  

Q. You have also looked to medieval Venice for modern globalization lessons.  What have you found?
I chose Venice for my research because it was the epicenter of Europe’s great experience with globalization, and I wondered why globalization had been so successful in Europe, but not in many other places. Venice gives us the answer.

At the start of its rise—which coincides with the end of the Dark Ages (about 1000 AD)—wealth was driven by international trade. Venice traded spices and industrial goods from the Levant in exchange for European silver and slaves (usually female slaves, but tour guides never mention this.) This international trade was not as easy as it sounds.

From a business perspective, it required new business forms such as the limited liability corporation, and new legal forms such as contract law and courts. Nobody had ever thought of these before, let alone tried them; so Venice had to invent them. And the Venetian feudal elite accepted these innovations not because they wanted to, but because successful entrepreneurs were demanding them. The richer these entrepreneurial long-distance traders became, the harder they pushed for new institutions that would support their activities.

Then—and this is the important part—they used their newfound economic muscle to fundamentally change the political and social landscape. Politically, they reigned in the feudal monarch and created a parliament, and socially, they circumvented the rigid hierarchy of feudal Europe and replaced it with an open society. The result was a ‘positive feedback’: economic and political competition empowered new generations of entrepreneurs who pushed for even greater economic and political competition.

Q. Your research also points to a darker side of Venice. Please describe it.
In the 1200s, Yankee Syndrome kicked in.  Venetian conquests created a massive overseas empire that came to be dominated by a small handful of powerful families. These were the families who built the beautiful palaces that today line the Grand Canal. But these families used their clout to change Parliament from an elected body to a hereditary one. They then passed laws which allowed them to monopolize the spice trade and grow even richer. They even passed laws to track nobility status in order to create a highly stratified, status-oriented society. Over a period of two centuries, those once-dynamic, innovating entrepreneurs morphed into the incumbent economic elite and used their power to block economic and political competition.

Q. How do you define ‘failed globalization’?
Each country has its own notion of the ideal balance between the special interests of the economic elite and the general interests of innovative entrepreneurs. But many countries are nowhere near an ideal balance, and are leaning dangerously towards incumbent special interests. The arrival of multinationals in a country creates new sources of wealth and power, which upsets the balance. But in which direction? This is the key to understanding whether globalization helps or hinders. Where multinationals empower innovative entrepreneurs in the host country, they improve the country’s prospects; but where they further corrupt an already corrupt environment, globalization fails.

Q. Africa is quickly becoming the darling of the international investment community. What is your take on it?
I was recently in Beijing to give a talk about Africa. It was surreal: a Canadian in China talking about Africa. First off, Africa is a big place. Lot’s of diversity. For example, in the Kitanga region of the Congo, globalization is a very negative force. The place is famous for its copper and coltan mines. Mining there is less about entrepreneurship and more about bribing government officials and working with local rebels. It’s little wonder that Kitanga is a violent, lawless place with no respect for property rights or workers.  Ironically, the value created by multinationals has made things worse, because there is now a lot more for people to fight about. Globalization has fueled the corruption and violence of an already brutal elite. As I’ve indicated, it’s all about what multinationals do to the local balance.

Q. Looking ahead, are you up-beat about Africa and globalization?

There are now half a dozen African countries that are making great strides. For example, in Ethiopia, Chinese shoe giant Huajian is setting up a major factory to serve Europe. At this stage, Ethiopia’s nascent success is all about cheap labour, and hopefully, it will go beyond that.

Together with my good friend and co-author John Sutton of the London School of Economics, I have written about building knowledge capacity as the key to laddering people out of poverty. John has spent the last decade helping the Ethiopian government put in place a regime that is attractive to more knowledge-based multinationals. As a result, the government now understands the role of investor protections, the need for infrastructure, the role of industrial zones and so on. If things pan out, a new entrepreneurial class will emerge in Ethiopia and push an innovation agenda. So globalization is starting to work there.

Q. You mentioned China. How does it fit into the picture?
I firmly believe that the world is bifurcating along knowledge lines, and this bifurcation is the reason why globalization works in some places and fails in others. In some places, globalization is about ‘extracting what you can from the host country and getting out’. Companies do this by recruiting the incumbent elite and offering it a share of the profits. But as indicated, this only serves to strengthen the economy’s most regressive forces. Globalization pushes the local balance in the wrong direction—i.e., globalization fails.

In other countries—China, for example—companies are producing goods that require entrepreneurship and a modicum of innovation, and where that happens, globalization advances the interests of progressive forces in the country. These interests are better served by investor protection, the rule of law, and diminished power of the state. In these cases, balance is shifted towards success, and globalization works.

Just look at the rise of patent courts in China. There was a time when IP theft was the norm, but now that Chinese entrepreneurs are innovating, they need the same protections that Americans have been screaming for. These entrepreneurs are demanding IP protection, and they are getting it; so the balance is shifting in the right direction.

Where is China heading? It faces a bumpy road. On the one hand, it is becoming a centre of world innovation and entrepreneurship; but on the other hand, this dynamic sector is bumping up against the power of the Communist Party. So far, the Party is delighted, because this new sector is delivering growth, which is the key to stability. But as my Rotman colleague Wendy Dobson points out in her book Partners and Rivals, eventually the Party will be threatened by political competition from new and powerful entrepreneurial interests. Personally, I don’t believe that the Party will simply back down. Instead, we are likely to see a period of great political instability in China.

Dan Trefler is the Douglas and Ruth Grant Canada Research Chair in Competitiveness and Prosperity and Professor of Business Economics at the Rotman School of Management.  Rotman faculty research is ranked in the top 10 worldwide by the Financial Times.

[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]

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