You have been a forceful advocate for globalization, yet you also

believe that in many ways, it isnt working. Please explain.

I have long argued that Canadas international trade agreements have made
us a more competitive and more prosperous nation. Thats a hard fact, and
I invite naysayers to show that my decade-long study of 10,000 Canadian
firms shows otherwise. As a result I am pushing hard on the Canadian
government to continue its initiatives for deeper integration with our
American, European and Asian partners.

But only an ideologue could ignore the hard fact that globalization is not
workingor not working as well as it could. For example, it has produced
bad results in a number of African countries, and even where it is working,
outcomes could have been much better. It did not work, for instance, for
the Chinese workers who committed suicide rather than build iPhones; and
it did not work for the 1,129 workers who perished in the Rana Plaza
collapse.

It is no longer working as well for rich countries, either. We are now seeing
a boomerang effect, where the developed countries that pushed for
globalization are becoming its victims. An outpouring of new academic
researchincluding my ownsuggests that globalization is leaving the
middle class behind. That doesnt mean we should abandon globalization.
It is inarguably an important driver of rising living standards worldwide;
but we need to do better at managing its downsides.

Q. In many countries, you believe economic elites use their

incumbent position to rig the rules of the game. Please explain.
Within every successful society there is a yin-yang of two opposing forces:
lined up on one side are the economic elites who have come to dominate
mature industries and use their economic clout to further their narrow self
interests: and on the other side are young entrepreneurs whose disruptive
new ideas are raising productivity in new and exciting ways, creating high-
paying jobs, and transforming the competitive landscape. In the richest
countries, the latterentrepreneurial dynamismusually wins the day. But
in the poorest countriesincluding much of Africathe established elites
are so powerful that entrepreneurship and innovation are suffocated.

Most countries lie in limbo between these two extremes. In countries like
Mexico, home to telecom giant Carlos Slim (who surpassed Bill Gates last
July as the worlds richest man), the economy is stuck in reverse as a result
of huge inefficiencies in monopolized sectors such as telecom and energy. It
is these in-limbo countries that I find most interesting. They suffer from
what I call Yankee Syndrome. Heres how it works: each year, the best
young talent in baseball is drafted by the weakest teams in Major League
Baseball (MLB), in order to level out the playing field. But as everyone
knows, the best talent always rises to the top, and is eventually snapped up
by the New York Yankeesthe most storied team in baseball, which has
appeared in almost half of all World Series and won a quarter of them.

The Yankees are the established elites of baseball, and like economic elites,
they use their incumbent position to rig the rules of the game: so while
every professional sport has a salary cap that levels the playing field, the
Yankees grossly outspend the average team. This works great for the
Yankees, but it doesnt work for all the other teamsor their fans.

Yankee Syndrome is what happens in countries like Mexico, where Carlos

Slim singlehandedly owns virtually the entire telecommunications industry.
He uses his power to rig the rules of the gamein this case, by stifling all
competition in his industry. This imposes a huge cost on society: the OECD
has estimated that Carlos Slim alone reduces Mexican GDP by 1.8%. This is
why the economic elite in Mexico and other in-limbo countries is the
greatest impediment to their future prosperity.

Q. You have also looked to medieval Venice for modern

globalization lessons. What have you found?
I chose Venice for my research because it was the epicenter of Europes
great experience with globalization, and I wondered why globalization had
been so successful in Europe, but not in many other places. Venice gives us
the answer.

At the start of its risewhich coincides with the end of the Dark Ages
(about 1000 AD)wealth was driven by international trade. Venice traded
spices and industrial goods from the Levant in exchange for European
silver and slaves (usually female slaves, but tour guides never mention
this.) This international trade was not as easy as it sounds.

From a business perspective, it required new business forms such as the

limited liability corporation, and new legal forms such as contract law and
courts. Nobody had ever thought of these before, let alone tried them; so
Venice had to invent them. And the Venetian feudal elite accepted these
innovations not because they wanted to, but because successful
entrepreneurs were demanding them. The richer these entrepreneurial
long-distance traders became, the harder they pushed for new institutions
that would support their activities.

Thenand this is the important partthey used their newfound economic

muscle to fundamentally change the political and social landscape.
Politically, they reigned in the feudal monarch and created a parliament,
and socially, they circumvented the rigid hierarchy of feudal Europe and
replaced it with an open society. The result was a positive feedback:
economic and political competition empowered new generations of
entrepreneurs who pushed for even greater economic and political
competition.

Q. Your research also points to a darker side of Venice. Please

describe it.
In the 1200s, Yankee Syndrome kicked in. Venetian conquests created a
massive overseas empire that came to be dominated by a small handful of
powerful families. These were the families who built the beautiful palaces
that today line the Grand Canal. But these families used their clout to
change Parliament from an elected body to a hereditary one. They then
passed laws which allowed them to monopolize the spice trade and grow
even richer. They even passed laws to track nobility status in order to create
a highly stratified, status-oriented society. Over a period of two centuries,
those once-dynamic, innovating entrepreneurs morphed into the
incumbent economic elite and used their power to block economic and
political competition.

Q. How do you define failed globalization?

Each country has its own notion of the ideal balance between the special
interests of the economic elite and the general interests of innovative
entrepreneurs. But many countries are nowhere near an ideal balance, and
are leaning dangerously towards incumbent special interests. The arrival of
multinationals in a country creates new sources of wealth and power, which
upsets the balance. But in which direction? This is the key to understanding
whether globalization helps or hinders. Where multinationals empower
innovative entrepreneurs in the host country, they improve the countrys
prospects; but where they further corrupt an already corrupt environment,
globalization fails.

Q. Africa is quickly becoming the darling of the international

investment community. What is your take on it?
I was recently in Beijing to give a talk about Africa. It was surreal: a
Canadian in China talking about Africa. First off, Africa is a big place. Lots
of diversity. For example, in the Kitanga region of the Congo, globalization
is a very negative force. The place is famous for its copper and coltan mines.
Mining there is less about entrepreneurship and more about bribing
government officials and working with local rebels. Its little wonder that
Kitanga is a violent, lawless place with no respect for property rights or
workers. Ironically, the value created by multinationals has made things
worse, because there is now a lot more for people to fight about.
Globalization has fueled the corruption and violence of an already brutal
elite. As Ive indicated, its all about what multinationals do to the local
balance.

Q. Looking ahead, are you up-beat about Africa and

globalization?
There are now half a dozen African countries that are making great strides.
For example, in Ethiopia, Chinese shoe giant Huajian is setting up a major
factory to serve Europe. At this stage, Ethiopias nascent success is all about
cheap labour, and hopefully, it will go beyond that.

Together with my good friend and co-author John Sutton of the London
School of Economics, I have written about building knowledge capacity as
the key to laddering people out of poverty. John has spent the last decade
helping the Ethiopian government put in place a regime that is attractive to
more knowledge-based multinationals. As a result, the government now
understands the role of investor protections, the need for infrastructure, the
role of industrial zones and so on. If things pan out, a new entrepreneurial
class will emerge in Ethiopia and push an innovation agenda. So
globalization is starting to work there.

Q. You mentioned China. How does it fit into the picture?

I firmly believe that the world is bifurcating along knowledge lines, and this
bifurcation is the reason why globalization works in some places and fails in
others. In some places, globalization is about extracting what you can from
the host country and getting out. Companies do this by recruiting the
incumbent elite and offering it a share of the profits. But as indicated, this
only serves to strengthen the economys most regressive forces.
Globalization pushes the local balance in the wrong directioni.e.,
globalization fails.

In other countriesChina, for examplecompanies are producing goods

that require entrepreneurship and a modicum of innovation, and where
that happens, globalization advances the interests of progressive forces in
the country. These interests are better served by investor protection, the
rule of law, and diminished power of the state. In these cases, balance is
shifted towards success, and globalization works.

Just look at the rise of patent courts in China. There was a time when IP
theft was the norm, but now that Chinese entrepreneurs are innovating,
they need the same protections that Americans have been screaming for.
These entrepreneurs are demanding IP protection, and they are getting it;
so the balance is shifting in the right direction.

Where is China heading? It faces a bumpy road. On the one hand, it is

becoming a centre of world innovation and entrepreneurship; but on the
other hand, this dynamic sector is bumping up against the power of the
Communist Party. So far, the Party is delighted, because this new sector is
delivering growth, which is the key to stability. But as my Rotman colleague
Wendy Dobson points out in her book Partners and Rivals, eventually the
Party will be threatened by political competition from new and powerful
entrepreneurial interests. Personally, I dont believe that the Party will
simply back down. Instead, we are likely to see a period of great political
instability in China.

Dan Trefler is the Douglas and Ruth Grant Canada Research Chair in
Competitiveness and Prosperity and Professor of Business Economics at
the Rotman School of Management. Rotman faculty research is ranked in
the top 10 worldwide by the Financial Times.

[This article has been reprinted, with permission, from Rotman

Management, the magazine of the University of Toronto's Rotman School
of Management]