New Economy in Progress

Globalization produces discontent and policy needs to take costs and compensation more seriously.


Read Part 1: Making Globalization work for all: The Challenge

Read Part 2: Making Globalization work for all: What went wrong?

Harvard economist Dani Rodrik has been one of the first and most famous economists to have warned that globalization may have quite negative impacts. Rather early Rodrik pointed out the losers as well as the shrinking gains from liberalizing trade when countries have reached a certain level of integration (Rodrik, 1998). Today, there is an emerging consensus among critical economists that liberalizing trade ever more cannot become an end to itself. Even the formerly highly orthodox OECD has recently published an entire report on “making trade work for all” (OECD, 2017). In practice, the reduction and harmonization of trade barriers has also had a detrimental impact on employment and wages in many regions around the world. While theoretically the winners could have compensated the losers for their losses, in practice this has never happened. New research tries to better understand the impacts of globalization and it evaluates adequate policy tools to cope with the negative effects of trade liberalization. While it is difficult to imagine another shock as severe as the integration of China into the global economy, there still seems to be a lot to learn for the future. The rise in employment of robots and artificial intelligence, for example, might very well be comparable in terms of its disruptive impact on labor markets.

Currently discussed policy recommendations to better manage globalization include the following:

  • Labor market and distribution policies: International organizations such as the OECD (2017), IMF, World Bank and WTO (2017) have called for more active labor market policies, such as training programs and job search assistance, as well as more effective redistribution through social insurance and income support programs. Some academics like Branko Milanovic have gone further and called for a broader redistribution of the gains from globalization, for example through the introduction of an inheritance tax (Milanovic, 2017).
  • Macroeconomic policies: For workers displaced by globalization a lot of distress can be alleviated if these workers can quickly acquire new employment. Because it is easier for workers to find a job during periods of growth, it has been suggested that macroeconomic policies should be used to stabilize economic growth (IMF, World Bank and WTO, 2017).
  • Regional policies: Regions are affected differently by a trade shock. Regions that have a high concentration of export-competing industries may gain, while regions facing strong import-competition may lose from the liberalization of trade. Some authors have therefore suggested that regional policies should be employed to promote businesses in depressed areas (IMF, World Bank and WTO, 2017; Südekum, 2017).
  • “Shallow” trade agreements: Some authors have argued that the efficiency gains from further trade liberalization are relatively small, whereas the distributional effects are relatively large. Dani Rodrik (2016) has argued that policy makers should refrain from “deep” trade agreements. However, this is still a fringe opinion.
  • Increasing cross-border labor mobility: Some authors have argued for allowing more workers to migrate from poor to rich countries. Rodrik (2016) and Milanovic (2017) argue that the benefits from large, but controlled migration flows come at relatively little distribution costs.
  • Industrial policies in developing countries: Other authors have emphasized the need for industrial policies, such as government support, subsidies or protectionism of selected industries in developing countries (Chang, 2002).

This knowledge base tries to summarize the broad lines of the paradigm debate for a broader public. The goal is to continuously expand and improve the knowledge base as it becomes progressively clearer what a new paradigm could consist of.


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