Three distinguished Harvard Kennedy School economists—Robert Lawrence, Carmen Reinhart, and Dani Rodrik—analyzed the current state of international trade and finance, and what lies ahead, at the first in a series of faculty panels on current global policy challenges that will take place this fall.
Last week's conversation, part of the Dean’s Discussions series, was introduced by Kennedy School Dean Doug Elmendorf and moderated by Sarah Wald, chief of staff and senior policy advisor to the dean. Rodrik is the Ford Foundation Professor of International Political Economy. Reinhart is the Minos A. Zombanakis Professor of the International Financial System. Lawrence is the Albert L. Williams Professor of International Trade and Investment.
Excerpts of the conversation are shared below.
Wald: How would you articulate the biggest challenges of the current global economy?
Lawrence: I will talk purely about trade. If you thought that the world was peaceful, and that we had no problems geopolitically between the United States and China, the trading system would still be in deep, deep trouble. The core institution, the World Trade Organization, was unable to negotiate the Doha Round, a fundamental trade agreement that was designed to promote the interests of developing countries. Thereafter, the leader of the trading system, ostensibly the United States, has become its greatest adversary, undermining basic tenants of that trading system. Coming up with a set of rules by which both the United States and the Western market-oriented economies and China, with its socialist-dominated economy, can both adhere to has proven to be extremely problematic and difficult.
Reinhart: If I had to use one word to characterize current global financial conditions, it would be “fragile.” We lived for a decade and a half in an era of exceptionally low interest rates. Only during World War One, World War Two, and in the 1970s did you have lower real interest rates than in the last 15 years. Those three periods ended with high inflation. Dealing with inflation means rate hikes, as we’re seeing across the board in the major central banks, with the associated risks of global recession, and exposing all kinds of financial fragility that are typically hidden.
The other issue that I would like to touch on is the state of low-income countries. If you look at the 73 or 74 poorest economies, about 65% are either in debt distress or at high risk of debt distress. That situation is likely to remain very fragile and get worse.
“Many of the problems that we’re seeing—increased fragmentation, the shift towards deglobalization, looking inward—started before the pandemic. The pandemic has of course, escalated things.”
Carmen Reinhart
Rodrik: We're coming off a period where developing countries were catching up. Looking forward, the expectations are that low-income countries are going to be doing much worse. Poverty alleviation rates have slowed down and have been reversed during the pandemic. There is a greater threat of a major reversal.
The second big issue is global security. We are in the midst of a transition in the system of international relations that is going to be extremely divisive and is going to have huge implications. Increasingly, international economic relations and trade are being weaponized for national security and geopolitical ends with the United States, in my mind, the greatest practitioner. That has very serious implications for the international economy.
And third, let’s not forget climate change. This really goes without saying—it threatens our physical existence. And it connects with the other two challenges because the only way that we can address climate change is through global cooperation. The developing countries—especially middle-income countries—that are going to have to do a lot of things to address climate change are under economic stress themselves.
Wald: Are these problems exacerbated because of the pandemic?
Reinhart: Many of the problems that we’re seeing—increased fragmentation, the shift towards deglobalization, looking inward—started before the pandemic. The pandemic has of course, escalated things. The poverty setbacks, the fact that we had seen convergence between lower-income and higher-income countries, that started as early as 2015 when commodity prices collapsed. The rift between China and the United States—and China's turning inward—has big consequences for the global economy. The pandemic has escalated the fragmentation and the fault lines that were there, but it did not create them.
Lawrence: The pandemic was a stress test, but the system was already vulnerable. One of the areas where it was already most vulnerable is global supply chains. For two decades, we had an incredible amount of progress in creating interdependence. Products were no longer made in individual countries and sold in others, but they were made in the world. So, identifying the origins of a product became extremely complex. This interdependence was premised on the idea that there was peace, and there were rules, and we could depend on one another. Therefore, we can specialize. Look at the way the Germans decided they could depend on the Russians for their energy, as an example. And then, when a series of shocks hit us—like the pandemic, like the shortage of semiconductor chips, like the absence of vaccines, like war—we suddenly realized that interdependence has another side, and it can be weaponized. All the elements that are required for a smoothly functioning system based on global supply chains have been put under stress and are cracking. At the same time, the way we produce things remains dependent on others. So, we have this inherent conflict, and it’s currently playing itself out.
“The biggest paradox is that that the greatest beneficiary of post-1990 hyperglobalization was China, which grew incredibly rapidly, but did so pursuing policies that were in violation of the rules of hyperglobalization.”
Dani Rodrik
Rodrik: I think the problems were there. They were just exacerbated by the pandemic and the war. These problems were rooted in a maximalist view of pushing economic integration and international trade as a one-sided objective that overpowered or overshadowed other objectives. The kind of globalization that we pursued in the 1990s, which I call hyperglobalization, to distinguish it from other models of globalization, created a lot of tensions. On the one hand, there were the gains from trade, but there were a lot of tensions within countries, and distributional problems in the advanced countries, which were part of the backdrop to Brexit and why we got the rise of ethnonationalist and populist authoritarian movements around the world.
The biggest paradox is that the greatest beneficiary of post-1990 hyperglobalization was China, which grew incredibly rapidly, but did so pursuing policies that were in violation of the rules of hyperglobalization, namely, by controlling exchange rates and engaging in widespread industrial policies violating the spirit—if not the letter—of the WTO.
Lawrence: We have made a transition to a digital economy in which manufacturing has become less important as a provider of jobs for low-skilled workers. If you look at the United States, we have had non-inclusive growth. A significant part of our population, and the populations within Europe, have not shared in the fruits of growth—especially men who don’t have college degrees. Men in the United States have seen no rise in their real incomes for five decades. This has created a tremendous amount of pain and despair among people, and they have turned to a variety of explanations for their plight, including international factors.
Regional inequality has been exacerbated. In the United States, a group of superstar cities have done well with the new technologies, and a large number of left-behind places, who used to depend on manufacturing, now have prospects that look bleak. This regional inequality and income inequality has exacerbated some of the strains that the global economy has wrought. The combination has created a situation which is very rife for populism.
Wald: What are the ways forward?
Rodrik: There’s the good, the bad and the ugly. The good path forward would be a rebalancing in the economy and pursuing, domestically, more inclusive economic policies as a key priority. The bad path would be a 1930s-style scenario where the world economy collapses and world trade spirals down. I don’t think that's likely to happen. But then there’s the ugly scenario, which is a continuation of the path that we are on now, with the pursuit of great power rivalry. It could lead to a world where not only do we not get the benefits of international cooperation, but where international trade is weaponized.
“If you look at the United States, we have had non-inclusive growth. A significant part of our population, and the populations within Europe, have not shared in the fruits of growth—especially men who don’t have college degrees.”
Robert Lawrence
Reinhart: The breakdown in international cooperation needs repair. Climate change requires international cooperation. Coping with a widening rift between low- and high-income countries needs international cooperation, and, therefore, restoration.
We need to give up on the idea that we have free lunches, that soft landings can be engineered easily. The median inflation rate right in advanced economies is over 9%. That requires very difficult policy choices. Advanced economies, including the United States, also have record levels of sovereign debt. The idea that you're going to chip away at that without taxes is pie in the sky.
Lawrence: We have neglected the domestic needs that accompany the globalization process. We have failed at policies providing assistance in a broad sense, training for those who are dislocated, investing in people. At the same time, there is much that is positive in the development of those global supply chains. Those countries that are willing to engage in deeper integration and coordination should do so. But we need a pluralistic system in which we allow those who aren’t ready for that kind of integration to follow their own course.
A lot of the weaponization is coming from China, as well as the United States. We are seeing global leadership with Chinese characteristics emerge. I think China was proceeding very well until President Xi took over, or maybe just before. It was implementing reforms, and dynamic firms like Alibaba and Tencent emerged. What we’ve seen since then is President Xi taking hold and exerting huge power. Now resources are being allocated away from the private sector and towards the state sector in China. And so far, the results are not that good.
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Photographs by STR/AFP via Getty Images and Martha Stewart