CAMBRIDGE – The story that underpins today’s global economic system is in the midst of a transformative plot twist.
Since the end of World War II, the so-called liberal international order has been based on the free movement of goods, capital and finance, but this arrangement now appears to be becoming increasingly anachronistic.
Each market order is supported by stories – stories we tell ourselves about how the system works. This is especially true in the global economy because, unlike individual countries, the world does not have a central government that acts as a regulator and enforcer.
Together, these stories help create and maintain the norms that keep the system operating in an orderly manner and tell governments what to do and what not to do.
And when internalized, these standards support global markets in ways that international laws, trade treaties and multilateral institutions cannot.
Global narratives have shifted countless times throughout history. Under the gold standard of the late nineteenth century, the world economy was seen as a self-adjusting, self-balancing system in which stability was best achieved when governments did not interfere.
The free movement of capital, free trade and sound macroeconomic policies, it was believed, would yield the best results for both the global economy and individual countries.
The collapse of the gold standard, along with the Great Depression, put a big dent in this benign market story.
The Bretton Woods regime that emerged after World War II, which relied on Keynesian macroeconomic management to stabilize the global economy, gave the state a much more prominent role.
Only a strong welfare state could provide social security and support those who have fallen through the cracks of the market economy.
The Bretton Woods system also changed the relationship between domestic and global interests. The world economy, built on a model of superficial integration, was subservient to the goals of ensuring full domestic employment and establishing just societies.
Capital controls and a permissive international trade regime allowed countries to create social and economic institutions that suited their individual preferences and needs.
The neoliberal hyper-globalization narrative that became dominant in the 1990s, with its bias towards deep economic integration and the free flow of money, was in many ways a return to the gold standard narrative of benign and self-adapting markets.
It did, however, recognize a crucial role for governments: to enforce the specific rules that made the world safe for big companies and big banks.
The benefits of benign markets were meant to extend beyond economics. The economic benefits of hyper-globalization, neoliberals believed, would help end international conflict and strengthen democratic forces around the world, especially in communist countries like China.
The hyper-globalization narrative neither denied the importance of social justice, environmental protection, and national security nor challenged the responsibility of governments to pursue them.
But it assumed that these goals could be achieved through policy instruments that did not stand in the way of free trade and finance.
Simply put, it would be possible to have your cake and eat it. And if the results were disappointing, as it turned out, the blame was not on hyper-globalization, but on the lack of complementary and supportive policies in other areas.
Hyperglobalization, in retreat since the 2008 financial crisis, ultimately failed because it failed to overcome its inherent contradictions.
In the end, the governments that empowered corporations to write the story were unlikely to persuade the authors of that story to support domestic social and environmental agendas.
As the world moves beyond hyper-globalization, it remains highly uncertain what will replace it. An emerging economic policy framework, which I have termed “productivism,” emphasizes the role of governments in addressing inequality, public health, and the clean energy transition.
By bringing these neglected goals to the forefront, productivism reaffirms domestic political priorities without harming an open global economy.
The Bretton Woods regime has shown that policies that support cohesive national economies also help promote long-term international trade and capital flows.
Another emerging paradigm could be called hyperrealism, after the “realistic” school of international relations.
This story highlights the geopolitical rivalry between the United States and China and applies zero-sum logic to the economic relations between great powers.
The hyper-realistic framework views economic interdependence not as a source of mutual gain, but as a weapon that can be used to cripple opponents, as the US did when it used export controls to restrict access to advanced semiconductors and the equipment to be manufactured by Chinese companies. deny. them.
The future path of the global economy will depend on how these competing policy frameworks play on their own and against each other.
Given the overlap between the two in terms of trade, governments will most likely adopt a more protectionist approach in the coming years and increasingly embrace reshoring, as well as other industrial policies that promote advanced manufacturing.
Governments are also likely to implement greener policies that favor domestic producers, such as the US Inflation Reduction Act, or erect barriers at the border, as the European Union does through its carbon border adjustment mechanism. Such policies would serve both domestic and foreign policy agendas.
Ultimately, however, geopolitical considerations will most likely override all other considerations, allowing the hyper-realistic narrative to prevail.
For example, it is not clear whether the focus on advanced manufacturing, which characterizes the current industrial policy revival, will do much to reduce inequality within countries, as the good jobs of the future are likely to come from low-income service sectors. to offer. to compete against China.
Allowing the national security institutions of the world’s major powers to hijack the economic narrative would jeopardize global stability.
The result could be an increasingly dangerous world, in which the ever-present threat of military conflict between the US and China is forcing smaller countries to take sides in a battle that does not further their own interests.
We have a unique opportunity to right the wrongs of hyper-globalization and build a better international order based on a vision of shared prosperity. We must not allow it to be wasted by great powers.
Dani Rodrik, professor of international political economy at Harvard Kennedy School, is president of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Healthy Global Economy (Princeton University Press, 2017).
Copyright: Project Syndicate, 2023.www.project-syndicate.org