EGC Voices in Development

Understanding the backlash to globalization: Prof. Penny Goldberg on the complicated relationship between international trade, poverty reduction, and inequality

September 27, 2022 EGC Podcasts Season 1 Episode 2
EGC Voices in Development
Understanding the backlash to globalization: Prof. Penny Goldberg on the complicated relationship between international trade, poverty reduction, and inequality
Show Notes Transcript

Once embraced as a pathway to global prosperity, globalization has come under attack in recent years. International trade has decreased inequality between nations, but at the cost of sometimes increasing inequalities within nations. As countries try to deal with the unequal benefits of trade by turning to protectionism, how can global coordination and poverty reduction be sustained?

Pinelopi (Penny) Koujianou Goldberg – Elihu Professor of Economics and Global Affairs at Yale and an EGC affiliate – explores these subjects in her upcoming monograph. For globalization and trade to be welcomed, Goldberg says, “redistribution has to go hand-in-hand with trade liberalization.”

Goldberg’s path into economics was heavily influenced by her upbringing in Greece during the 1970s, as increasing trade flows played an important role in the country’s transition to a middle- and then high-income economy. She went on to serve as Chief Economist at the World Bank Group, taking her academic career into the world of policy. Goldberg is a leading microeconomist on trade and development and her work has been published in Econometrica, the Quarterly Journal of Economics, the American Economic Review and the Review of Economic Studies, among other journals. She delivered the Ohlin Lecture in Stockholm in 2019, and her monograph “The Unequal Effects of Globalization”, based on that talk and other research, will be published in 2023.  

Hello and welcome to our podcast. I’m your host, Catherine Cheney. We’re coming to you from the Economic Growth Center at Yale University, which is focused on economics and data-driven insights for equitable development. Today, we’re going to be speaking with Pinelopi Koujianou Goldberg.  

Penny is Elihu Professor of Economics and Global Affairs and an affiliate of Yale’s Economic Growth Center. Her work in economics has covered some of the most important questions policymakers face related to trade and development. Penny grew up in Greece. She studied at a German language school, then went on to study economics at a German university, due in large part to the influence of her parents, engineers who admired German engineering. Penny was motivated to pursue a PhD at Stanford University because, as she tells it, she wanted a job at the World Bank. Well, that worked out. In fact, from 2018 to 2020, she was the Chief Economist of the World Bank Group.   

Penny’s career has spanned academia and policy. In this conversation, we’ll discuss how her upbringing in Greece helped to shape her interest in trade and development, some of the research questions she’s pursued over the course of her career and her upcoming monograph, “The Unequal Effects of Globalization.” Penny will also expand on some of the challenges she faced as a leader at the World Bank during a particularly turbulent period in global trade policy.  

00:02:32:00 - 00:04:04:00 

Cheney: Penny. Welcome to Voices in Development. Thank you so much for joining us today.  

  

Goldberg: Thank you for having me.  

 

Cheney: Of course. You've mentioned before how growing up in a small country influenced your path into economics with a focus on trade. And while I get that intuitively, I wonder if you can expand on what that really looked like.   

  

Goldberg: Growing up in Greece in the seventies, one had the sense that economics was the key to understanding the world. Traditionally, people who went to academia in Greece went to engineering. Greek academics have a very long tradition in engineering. As I was growing up, Greece was becoming richer. It was moving from a low-income country to a middle-income country and then a high-income country. And it became increasingly important to understand how economic relationships worked. That led me naturally to economics.  

Economics also gave me a chance to combine two interests of mine, one mathematics and one in economic history or in human behavior more generally. Now, when it comes to trade, if you come from a small country like Greece, you inevitably think that trade is the most important subfield. If you grow up in the United States or generally speaking, a big country, you probably don't have this impression. Many American undergraduates are very interested in health these days or climate change. But if you come from a small country, a small country that's growing, then you realize that trade is very important. As I was getting into economics, I had a very natural interest in trade and development.  

 

00:04:04:00 - 00:06:15:00 

Cheney: And that interest in trade and development took you to the University of Freiburg in Germany, and then onto Stanford University. I know you’ve mentioned that you pursued a PhD because you wanted to work at the World Bank, and not only did you go on to work there you actually served as its Chief Economist. Can you go ahead and tell us more about that role and what was it like for you moving from academia into policy? 

 

Goldberg: As chief economist of the World Bank, you have essentially two functions. You are the head of the research department and you're also a high-level consultant to the president of the World Bank and the executive board. So, you have these two functions. And the first one is something that an academic is used to, except you act in a supervisory function. You are supposed to guide research, not necessarily conduct research yourself. The second one is something most academics are less familiar with.  

I think it's a very interesting experience for academics to go to policy and vice versa for policymakers sometimes to be exposed to academia. From my point of view, it really informed my research. It exposes you to a different way of thinking. It exposes you to questions that sometimes academics we don't spend enough time on, partly because these are questions that are very hard to address, and we may not have answers within the time frame that we view as acceptable.  

At the same time, there are also challenges and pressures that we're not used to. The most important one is that you have very little time. You don't have the luxury of taking months, if not years, to develop a research project, trying to find the best data available, the best collaborators, trying to find a credible empirical strategy to answer results. Policymakers need the answer yesterday. And so, what happens in most cases is you base your advice and your answers not on actual evidence, but on the accumulated wisdom of the past. And so there it really helps to have been exposed to many different ideas and a broad set of questions.  

 

00:06:15:00 - 00:09:18:00 

Cheney: I want to bring up something you said toward the end of your time in that role at the World Bank, and it was actually from an address you gave at Yale. Can you just take us back to that time, March 2020, as you're nearing the end of your time at the World Bank. What was the state of globalization at that time and what were the implications for development?  

  

Goldberg: That time marks the beginning of the turning point. Around 2015 to 2016, we experienced what I would call a backlash against globalization. Not only the United States, this was truly a global phenomenon. We had Brexit in Europe. We had very strong reactions against refugees and immigrants in Western Europe. Then we had the anti-trade rhetoric in the United States that culminated in the tariffs during the Trump administration.  

So, there was a very different climate regarding trade, regarding immigration, regarding globalization. And you could see that firsthand in the World Bank. In the World Bank that was a very difficult time for most of the staff because most people had spent their entire careers making the case for open markets, for multilateralism, for adopting good institutions in many developing countries. And starting in 2016, the word ‘trade’ became a forbidden word in the World Bank.  

Many people found themselves in a very difficult situation because the United States was doing precisely those things that in the past multinational institutions had discouraged developing countries from doing. That was the beginning of the turning point. And a good part of my research in the last few years has tried to unpack the factors behind these developments. So, what led to this turning point, to this backlash against globalization? That was 2018. And as you said March 2020, that's the beginning of another major crisis, that's the beginning of the COVID crisis. So, in the past few years, we have had to deal with COVID, and then in the last year we had yet another crisis on top of COVID, the war in Ukraine. And these last two events, the last two developments – COVID plus Ukraine – have dealt further blows to globalization. Now we have new and different arguments against open markets, against free trade.  

There are serious concerns about what people call the resilience of global value chains. There are serious geopolitical concerns. Trade creates dependencies, and dependency means in some cases, vulnerability. We will experience that both with COVID, but mainly with Ukraine. One is to take a stand, who are our friends, who are our enemies, who do we trade with? So, these are new questions that we are facing right now on top of those that we had faced prior to 2018.  

  

00:09:18:00 - 00:13:40:00 

Cheney: The main takeaway of your monograph, on the unequal effects of globalization, seems to be that international trade affects inequality but the relationship is complex. So, if you think that’s a fair assessment can you talk us through some of that complexity? 

 

Goldberg: That’s a very fair summary. The monograph starts with a puzzle. This backlash against globalization we've experienced started in 2015, 2016. That’s a time of global prosperity if you focus on the average person, the average consumer. Per capita incomes were rising, the financial crisis was over. Unemployment in the US was extremely low.  

And yet, we see the average person in many, in several advanced countries revolting against the status quo. So, what caused this? One answer is that it has a lot to do with the fact that the average person may have been better off than in the past, but at the same time we had huge inequalities within our advanced economies. Some people were better off, some people were worse off. And we do care, there is plenty of research on this. We do know that people care about their relative position in the world, not just their absolute position.  

This focus on this backlash against globalization can be explained to a very large extent by the increase in inequality. Now, when people talk about inequality, they usually mean income inequality or wealth inequality within the United States, or European countries – within our advanced economies. And what has received less attention in the debate in the last few years is the effects of trade on what is called global inequality.  

Global inequality refers to the inequality you see in the world if you pooled the entire population together across all countries. So, if you pooled the population in Africa and Asia and Australia and the United States everywhere together. And so, when you look at this latter dimension of inequality, countries with large populations like China or India become very important simply because there are many people living there. Now there is a wide consensus that in the last few decades global inequality has decreased substantially.  

And this is partly because the population in East Asia, primarily China, but also Korea and Vietnam, they were lifted out of poverty. And I would argue that trade and openness had a lot to do with this. They provided conditions that made it easier for the people in these countries to do better. Sometimes when people make arguments against trade – and this is often, you know, people who mean well, who are socially minded – they forget how trade has affected in a very positive way the lives of people in other countries.  

So, the point we're making in this monograph, is that trade has had a very positive impact on reducing global inequalities. At the same time, it has increased inequality within advanced countries. And again, when we talk about inequality within countries, we need to be specific here as to what measure of inequality we have in mind. Contrary to expectations, trade has not had a major impact in affecting the gap between skilled and unskilled workers.  

But what recent research has documented is that trade has very significant spatial effects, local effects. There are entire communities that were adversely affected, in relative terms, by exposure to imports from low wage countries. And that has led to a natural backlash against trade in these communities. Now, it turns out that this also matters politically because of our political system. So, the economic dissatisfaction with trade, with increasing import competition from low wage countries translated to political results.   

  

00:13:41:00 - 00:15:23:00 

Cheney: You mentioned this backlash against trade. This topic you’ve followed over the course of your career has become increasingly politicized. How have you navigated that? 

 

Goldberg: Well, as academics, we tend to always argue based on evidence and reason, not based on politics. So, during the time of – if you want – unbridled capitalism, during the time of hyper globalization in the nineties when people embraced free trade without any restraints, there were many people, including me, who were arguing, this is all great. But we also need to take into account the fact that trade has also distributional effects. It creates winners and it creates losers. And we need to take that into account because if we don't, eventually there will be backlash.  

And of course, this happened. Now during my time with the World Bank, we were in the midst of this backlash where, again, we went to the other extreme. Rather than arguing in favor of trade, people were embracing protectionism, going back to regimes where countries were focused on the domestic economy, cutting off trade with foreign countries. In many cases, the comments made had racist undertones. As an academic, your function is to actually bring reason back to the debate. And I try to do that not just as Chief Economist of the World Bank, but also as an academic. I think this is an important function that we can all play these days.  

 

00:15:24:00 - 00:17:04:00 

Cheney: So, I know the consensus among many economists is that technology has played a bigger role than trade policy in driving globalization. But my understanding is that you disagree, and that really the data shows us trade policy has played a really critical role in globalization, in development. Can you expand on that a little bit and then we'll get to what that means for policy?  

 

Goldberg: When people say technology was the major factor between the increase in trade behind globalization, what they have in mind is that the sharp decline in communication costs, in transportation costs, and this has certainly happened. However, what has been more important is the interaction of these new technologies with trade policy, namely with a sharp decline in tariffs in developing countries. I'm not talking here about developed countries, about advanced countries. These countries had already reduced tariffs a long time ago. 

But the reduction of tariffs in developing countries is a relatively new phenomenon. At the same time, we saw many regional trade agreements, these have also played a very significant role and then increased participation, especially of low-income countries in multilateral institutions. Most importantly, the entry of China into the World Trade Organization. So, my claim is that these developments, that the trade policy developments were as important as the technological developments. And of course, most importantly, it was the interaction between the two, the interaction of technology with trade policy, that accounts for the change in trade we witness in the last few decades.  

  

00:17:04:00 - 00:20:34:00 

Cheney: Your monograph’s analysis stops in early 2020, but events since then – from the pandemic of course to the war in Ukraine – have had major impacts on trade and inequality. So can you comment on these developments and the implications they have for the issues you focus on? 

 

Goldberg: First, let me say that during the COVID years – that sounds strange because COVID is still going on. But let's say at the peak of the pandemic in late 2020 and 2021, people were making arguments against trade or global value chains that were not founded in data, in evidence. So, people were using coffee to support arguments against free trade that they had made all along. For example, that the shortages we were experiencing were due to the collapse of global value chains.  

I don't think this is true. Yes, there were short-term shortages, especially when it comes to PPE, that were due to failures in exports. But these were short lived. They lasted a few weeks and then the supply came back on. Why did it come back on? Because we could rely on imports from other countries that in the meantime had managed to recover from at least the first wave of COVID. So, I would argue that things would have been much worse if we had no trade between countries, especially given the fact that the shocks were not totally synchronized. So, you know, during some months, some countries were closed other countries were not. And the countries that were not closed were able to export goods to the countries that were closed. We saw that again and again during these two years. People using what was happening with COVID to make the argument that we should all turn inward and focus on the domestic economy.  

Then, as we are coming out of COVID, the war in Ukraine came. And that to me is a very different issue, because now, again, the world is experiencing shortages, especially in energy markets and in food. That has very little to do fundamentally with the nature of trade. It has a lot to do with geopolitical alliances. And so, when people talk about ‘globalization 2.0’ or a new face of globalization, what they often have in mind is realignments in global trade flows, in global value chains that are consistent with this new picture of geopolitics that is emerging.  

Along these lines I have very recent work with various co-authors where we look at what happened in the aftermath of the trade war between the US and China. Again, this is all pre-COVID and pre-Ukraine, but we do have data for that period. And what we find is that the trade war between the U.S. and China reallocated trade flows away from these two countries. But it did not lead to a decline in world trade. Actually, world trade increased in the end it’s just that other countries, different countries, raised their trade relative to the U.S. and China. I think what we are experiencing right now is this reallocation of trade, this reallocation of trade flows and perhaps also economic activity across the world, away from some countries that are economically adversely affected by various shocks or politically less desirable these days and towards other countries.  

  

00:20:34:00 - 00:23:52:00 

Cheney: I want to ask you about your call to action for policymakers. Drawing from the monograph you say that researchers and policymakers should ‘focus more seriously on the disruptions, transitions and adjustments from globalization than on estimating, defending or condemning its ultimate impacts’. So, I suppose that in itself is a call to action. Can you tell us more about that advice you have and what else would you say to policymakers?  

 

Goldberg: The first step towards solving a problem is admitting that you have a problem. I think when it comes to trade for many years, the prevalent approach towards dealing with the distributional effects of trade has been – in both academia and policy – to delegate this challenge to someone else. To make the point that as academics working in the field of international trade, or as policymakers, our job is to defend trade, to make the point that trade is beneficial to the world. And the reason for that is that this point is not obvious to the public. So, our function is to make this point. I remember one colleague many years ago telling me, you don't need to talk about the distributional effects of trade because the unions are going to do that. Your job is to convince the world that trade is beneficial. Now, the problem with this is if you are saying repeatedly things that are contrary to people's experiences, then you lose credibility.  

So, if someone has just lost their job and they are stressed and are trying to find new employment, and you are telling them, well, this is really sad, this is tough, but now you can buy toys for your children at lower prices, isn’t that's great? You know, when we make statements like that, which we do, actually, that's the standard argument: ‘You may lose jobs in the short run, but prices are going to be low and you're going to be exposed to more variety.’ That's all true but this is not very helpful to someone who has just lost their job. So, I think having an honest conversation where we admit that, yes, trade has some very strong long term beneficial effects, but it also creates disruption in the short run and disruption has very serious consequences. Not only at the individual level, but as we've seen recently, it also has very serious political consequences.  

First, we need to admit that. Second, as international trade economists we should also make clear that it's our job to deal with these questions and not delegate to someone else. I think that's something that the World Trade Organization has realized. In the past the job of the World Trade Organization was just to promote trade liberalization without thinking about what would happen afterwards. So, the idea was we liberalize and then the domestic policymakers can come in, figure out what the right policies are. That's not good enough.  

So, at least as international trade economists, we need to make the point that redistribution has to go hand in hand with trade liberalization. 

 

00:23:52:00 - 00:26:52:00 

Cheney: So, if the first step is acknowledging the problem, and next it’s dealing with the challenges rather than delegating, then what are the actions that are required? 

 

Goldberg: There is much less consensus and much less clarity as to what we should do but I would propose two particular measures. One, I think, is the lesson from all these past years is that sometimes we need to take things more slowly.  

During the nineties and the first decade of the 21st century, we all embraced these hyper-globalizations, the unbridled capitalism that, you know, was also motivated partly by the collapse of the Soviet Union. You know, the rise of neoliberalism. It was the time of true belief in what capitalism can deliver. Things happened too fast and at a pace that most people in most countries and most firms could not cope with.  

Sometimes it's better to take more time to give individuals, firms and countries time to adjust. I think that's one lesson. I'm not saying that to advocate protection, but perhaps sometimes the positive side of protectionist measures is that they give agents some time, they give them some space to figure out what to do next.  

And second, the second major insight that has come out of recent research is that openness, whether we talk about trade or immigration, has local effects, you know, affects that are spatially concentrated. And this explains sometimes why developments that we may view as minor, e.g. how many immigrants enter the United States in a particular year were lately many more than in the past.  

In general, you would think that immigrants are a relatively small proportion of the total population in the United States. Same thing with trade. If you conduct aggregate calculations, it's very hard to make the point that trade has been the major driver of inequality. It is not. But both immigration and trade have spatially concentrated effects. They affect the communities where the immigrants come in or where most of the jobs in import competing industries are concentrated.  

They affect these communities very much and they affect them not only economically, they affect them in many other ways. There is work that has shown that in such communities, crime rates go up, mental health deteriorates, many people go on welfare and so on. So, we see the decline of these communities in these places. And so, what I would take from all this research is that the policies need to be targeted towards regions, towards localities that have been adversely affected. It's not enough to target individuals, to target jobs. One needs to target the relevant communities.  

  

00:26:52:00 - 00:30:29:00 

Cheney: Picking up on something I found very interesting in your monograph. You were talking about global coordination on trade, and in terms of why that matters one point you made is that global coordination on trade could help in other realms, such as global coordination on climate change. And with that being another huge priority for the world right now, I wonder if you can speak to that relationship. First, just what do you see as the state of global coordination on trade right now and why does improved global coordination matter?  

  

Goldberg: The state of global coordination right now is dismal. It's the worst it's been in a while, and the decline started a while ago. No one speaks of multilateralism anymore to the extent that there is any global cooperation. This happens at the regional level.  

Now, when it comes to climate change, the nature of the problem is such that global coordination is a must, and coordination among countries in the same region is certainly not sufficient. Think of the United States and China, they're in very different regions. Unless these two countries coordinate, we're not going to make progress. You know, they're the biggest polluters in the world. Global coordination is a must if we want to make progress on these issues.  

I think that policymakers working on climate change could potentially learn a lot from those who have worked on trade policy.  

In the last few years, I think another interesting wrinkle to this is the tension that is emerging between advanced countries and developing countries. It started with trade policy. Starting with the tariffs during the Trump administration, the focus shifted first towards China and then towards all countries in which people earn lower wages and therefore present serious competition to U.S. workers. So, they pitted, in some sense, advanced countries where we have very good labor standards, high wages, against developing countries with worse labor standards, fewer environmental protections, lower wages which may be more competitive in trade precisely because they lack these protections that more advanced countries have.  

There is a tension right there. And it's not a tension that's easy to resolve, right, because we all want our workers to be protected. We are all in favor of better living standards. And of course, no worker in the United States wants to give up the rights they earned after many years of struggle. On the other hand, one is also sympathetic of the plight workers face in developing countries.  

The same thing, to a certain extent, applies to climate change. Many of us in advanced economies are willing to give up growth, or to go along with a slowdown of growth, in exchange for a higher quality of life that also involves a cleaner environment, better air, lower pollution and a better future. I think many people in low-income countries feel differently.  

For them, growth – even if this implies pollution and high emissions – is the priority. And so, when we talk about policies such as border adjustment taxes to address environmental issues, the tension between advanced economies and developing countries becomes apparent.  

  

00:30:30:00 - 00:30:44:00 

Cheney: Thank you, Penny. Well, you certainly bring both evidence and nuance to this discourse that is often heated and lacking in evidence on trade and inequality. I greatly appreciate your time. Thank you so much for joining us today.  

  

Goldberg: Thank you.  

 

00:30:44:00 - 00:32:08:00 

Cheney: Before we go, Aishwarya Lakshmi Ratan, Deputy Director of Yale’s Economic Growth Center, is joining us to share more on what’s happening at EGC. Aishwarya. 

Ratan: Thanks Catherine. The EGC has a long history of working on international trade and questions in this area. While the center started with a country study program in the early 60s, and a focus on the quantitative analysis of developing countries, there was a quick recognition of the need to think about relations between rich and poor countries and the mechanism of international trade obviously stands out as a key one. You can read more about EGC’s history and focus on international trade on our website. 

Also, do take a look at current work on international trade by EGC affiliates. For example, Amit Khandelwal and co-authors write about the US-China trade war, and Giovanni Maggi and co-authors discuss wasteful trade barriers. Those are just a couple of examples with more to come, so do take a look. 

Cheney: Thanks Aishwarya.  

That's all we have time for in this episode of Voices in Development. If you'd like to learn more about the Economic Growth Center, you can visit the website at www.egc.yale.edu. And look for the next installment of Voices in Development on EGC’s website or on Apple Podcasts, Spotify, or wherever you get your podcasts.