Abstract
A marked lack of sustainable economic growth has become an unfortunate but predominant characteristic of wealthy nations in the seven years following the financial crisis. Whether policymakers pursue fiscal stimulus or austerity, the outcome has been far from satisfactory. Notwithstanding Carmen Reinhart and Kenneth Rogoff’s argument that financial crises require a longer recovery time, is it possible that policymakers have the mix of policies wrong? The vast majority of wealthy states, after all, liberalized markets in the past two decades with the hope of emulating U.S. innovation and growth only to find instead they needed to reinsert themselves when capital and labor markets stalled. Given this failure, how prepared will the same states be for the next era of global competition, when emerging economies such as China and India that have benefited from rapid technological advances begin to leverage their economic and intellectual scale?
The authors of The Third Globalization address this question with a series of essays framed around a dilemma the editors, Dan Breznitz and John Zysman, term the “double bind.” In psychiatry, individuals face a double bind when they are unable to decide between conflicting statements from highly valued but distinct actors. In adapting the concept to political economy, the editors argue that politicians and policymakers in wealthy nations face similar indecision. On one hand, they need free markets to stimulate innovation and growth while, on the other hand, they need to reassert control of markets to foster social stability. The question is, can they do both at the same time?
This challenge borrows from the debate on Polanyi’s “double movement,” but the authors have taken a new tack by suggesting technological innovation and creativity are a necessary condition for both growth and stability. As such, it is a provocative and well-written resource for students and scholars. Drawing on a strong collection of comparative political economists, the book challenges readers to consider the potentially irreconcilable demands of political interests in wealthy economies. Because the essays are mainly analytical in nature with a short prescriptive outline in the conclusion, The Third Globalization may set expectations higher than it can deliver. For while it forces us to consider the varied national responses to past forces such as codification, fragmentation of production, and financialization, it only hints at new issues, such as agglomeration, winner-take-all digital platforms, and automation, that will have profound consequences for the future of growth (and work) in a global economy.
Divided into two sections, the book first addresses the opportunities created by the decomposition of production. To gauge the present threat, the early chapters focus on the competitive strategies of the largest new entrants, China and India, to exploit this new logic of production—a challenge that if met successfully may alone keep some wealthy countries from remaining wealthy. Framing the rise of China, Dan Breznitz and Michael Murphree highlight the local experimentation that occurs in China given the loose coupling between provincial and central officials. This lack of centrally directed specific objectives allows flexibility, referred to by the authors as “structured uncertainty,” for local policymakers and firms to experiment with new activities. While this has not fostered invention, it has created firms that have used incremental innovation to build scale and lower financial risks. Can these firms, however, become global competitors?
Gregory Noble believes not yet, at least not when it comes to Chinese automotive producers. On one hand, the advance of information and communications technologies (ICT) has allowed China to develop the first modularized auto industry. In addition, an environment of structured uncertainty has allowed provinces to spawn a rich ecosystem of suppliers enabling rapid growth of the industry. On the other hand, the ability to outsource significant pieces of components to meet demand has reduced the ability of Chinese firms to develop novel products or distinct brand identities. Crystal Chang reinforces this point by showing how Western producers have less to fear because government policies have overstimulated local assemblers leading to a fragmented industry and excess supply.
If manufacturers do not yet threaten Western competitors, will service providers? Rafiq Dossani finds that despite two decades of impressive growth in revenue and skills, large Indian IT firms, like their Chinese manufacturing counterparts, are still primarily concentrated in the low end of the global industry. Here again, national policies matter. By providing incentives to large diversified firms that had the financial resources to grow rather than to small firms that lacked capital, the state may have helped India’s IT industry build scale but on a less innovative trajectory. Equally important, this direction most likely crowded out entrepreneurial start-ups.
Despite these outcomes, Zysman et al. argue that the boundary between products and services continues to blur and that services are no longer a productivity problem but rather an enabler of new activities. If emerging economies continue to develop technological capabilities and skill, they will be able to increasingly capture the gains from ICT-enabled products and services, particularly as their ecosystems continue to grow. How then should wealthy states respond?
In the case of the United States, the continued dependence on dominant neoliberal financial thinking poses significant challenges. Mark Blyth argues that the country faces a double bind in choosing how and whether to re-regulate financial markets. Built on the algorithmic power of ICT advances, U.S. financial innovation rests on the assumption that financial risk can be statistically derived while in actuality, much of the financial engineering results in uncertain outcomes as systemic effects are not known. Getting this wrong will expose capital markets to future financial crises that may be less easily resolved. William Lazonick argues that the decomposition of production has allowed American technology firms to respond to the demands of financial markets to “maximize shareholder value” by increasing dividends and more important, by spending free cash flow on buying back shares to drive stock price gains. Rather than investing in new R & D, this policy has allocated gains disproportionally to managers and financial actors.
The two classical dirigiste states, France and Japan, are also poorly positioned. Jonah Levy portrays the French state as directionless, alternating between efforts to liberalize markets to stimulate innovation and directly intervening in an effort to build national champions. Steven Vogel finds equal dithering in Japan, where the state is held captive by incumbents reluctant to tear apart the institutional complements, such as lifetime work guarantees and long-standing supplier relations, that have been the key to the country’s past success. As a result, these institutions now stand in the way of nascent innovative actors. Do any states have the right mix of properties? Germany is the natural candidate, but the editors contend that its institutional settlement has allowed it to sidestep the double bind rather than manage it. Instead, Darius Ornston argues the Nordic countries have the correct policy mix. Rather than eliminating existing institutions, such as centralized bargaining, they repurpose them to support new, knowledge-intensive activities—a process Ornston refers to as “creative corporatism.” But how generalizable are policies from small states, especially ones with significant natural resources and a relatively homogenous population?
Similarly, how can the state develop policies when platform technologies increasingly cross sectors and thus traditional interest groups, as Mark Huberty suggests? What new political settlements will be required? While The Third Globalization is ultimately silent on this as well as on other contemporary issues such as urbanization and agglomeration, it provides a substantial and timely foundation on which new work can be built.