The political trilemma of the world economy

International economic integration

Rodrik, Dani (2000). How Far Will International Economic Integration Go? Journal of Economic Perspectives. Volume 14, Number 1. Nashville, Tenn.: American Economic Association. S.180.

A familiar result of open-economy macroeconomics is that countries cannot simultaneously maintain independent monetary policies, fixed exchange rates, and an open capital account. This result is fondly known to the cognoscenti as the “impossible trinity,” or in Obstfeld and Taylor’s (1998) terms, as the „open- economy trilemma“. The trilemma is represented schematically in the top panel of Figure 2. If a government chooses fixed exchange rates and capital mobility, it has to give up monetary autonomy. If it wants monetary autonomy and capital mobility, it has to go with floating exchange rates. If it wants to combine fixed exchange rates with monetary autonomy (at least in the short run), it had better restrict capital mobility.

The bottom panel of Figure 2 suggests, by analogy, a different kind of trilemma, one that we might call the political trilemma of the world economy. The three nodes of the extended trilemma are international economic integration, the nation-state, and mass politics. I use the term “nation-state” to refer to territorial- jurisdictional entities with independent powers of making and administering the law. I use the term “mass politics” to refer to political systems where: a) the franchise is unrestricted; b) there is a high degree of political mobilization; and c) political institutions are responsive to mobilized groups.

The implied claim, as in the standard trilemma, is that we can have at most two of these three things. If we want true international economic integration, we have to go either with the nation-state, in which case the domain of national politics will have to be significantly restricted, or else with mass politics, in which case we will have to give up the nation-state in favor of global federalism. If we want highly participatory political regimes, we have to choose between the nation-state and international economic integration. If we want to keep the nation-state, we have to choose between mass politics and international economic integration.