Many believe that cities, regions, and countries should specialize: they cannot be good at everything, so they must concentrate on their comparative advantage. But, while this idea seems obvious, it is both wrong and dangerous.
Is there a paradox in globalisation? Dani Rodrik writes that a delicate balance exists between democracy and processes of globalisation. He notes that as different societies have different needs and preferences in terms of how they structure the institutions required to ensure markets function correctly, democratic pressures are likely to lead to a variety of different institutions across different territories. This diversity inhibits the global integration of markets by raising transaction costs across jurisdictions. Consequently, a world which is fully responsive to democratic preferences will be unable to achieve full globalisation.
The start of 2014 marks ten years since we began fretting about global imbalances, and specifically about the chronic trade and current-account imbalances of the US and China. A decade later, we can happily declare that the era of global imbalances is over.
Everyone admits that mainstream macro analysis took finance for granted before the crash, and those economists that did worry about such things were marginalised. But now ‘financial frictions modelling’ is the growth area within the discipline. However this explosion of work does not appear revolutionary, but just another example of adding particular ‘frictions’ or ‘market imperfections’ to standard models.
The selloff last week of the currencies of many emerging market countries while stock prices also declined can be seen as the result of “known unknowns” and “unknown unknowns.” How these will play out will become evident during the rest of the year.
Burden sharing, bail-ins, haircuts, or outright defaults should never be ruled out. Quite the contrary. But there is no reason to abandon the practice of determining what is needed on a case-by-case basis or to presume that a breach of contracts is necessary.