There has been a radical shift in the narratives that underpin today's global economic system. Since the end of World War II, the so-called liberal international order has relied on the free flow of goods, capital and finance, but today such an arrangement increasingly looks like an anachronism.
Every market order is supported by narratives - thinking about the functioning of the system. This is particularly true of the global economy because, unlike individual countries, the world does not have a central government that creates the rules and enforces their compliance. All these narratives together help to establish and support the norms that allow the system to function as intended and guide governments on what they must and must not do. When these norms are solidified, they underpin the global market in a way that international law, trade agreements, and multilateral organizations cannot.
Throughout history, global narratives have changed many times. At the end of the 19th century, at the time of the gold standard, the world economy was perceived as a system that corrects itself, finds balance on its own and achieves stability best when governments do not interfere in its work. According to this reasoning, the free movement of capital, free trade and sound macroeconomic policies are able to produce the best results both in the world economy and in individual countries.
The collapse of the gold standard, and also the Great Depression, fundamentally undermined the credibility of the benevolent markets argument. The Bretton Woods regime, established after World War II, relied on the Keynesian teaching of macroeconomic management to stabilize the world economy and gave the state a much more important role. From that perspective, only a strong welfare state can provide social security and help those who have fallen into the cracks of the market economy.
The Bretton Woods regime also changed the understanding of the relationship between local and global interests. The world economy was built on a model of superficial integration and was subordinated to certain goals - to ensure full internal employment and create fair societies. Thanks to capital controls and a soft international trade regime, states were able to form social and economic institutions that suited their individual preferences and needs.
The neoliberal narrative of hyperglobalization, dominant in the 1990s, favored deep economic integration and free financial flows and, in many ways, represented a return to the narrative of the gold standard—the beneficial effects of self-regulating markets. In that system, the crucially important role of the state is recognized: control of compliance with specific rules that make the world safer for large corporations and banks.
It was assumed that the benefits of free markets would not be limited to the economy. Neoliberals believed that the economic benefits of hyperglobalization would help end international conflicts and strengthen democratic forces around the world, especially in communist countries such as China.
The narrative of hyperglobalization does not deny the importance of social justice, environmental protection, national security and does not dispute that it is the duty of the state to achieve these goals. But that theory starts from the assumption that these goals can be achieved by means of instruments and policies that do not interfere with free trade and the movement of capital. In simpler terms, she also promised that the wolves would be full and the sheep would be numerous. And if the results were disappointing (which, in fact, happened), then the culprit will not be hyperglobalization, but the absence of supplementary support measures in other spheres.
Hyperglobalization has been in decline since the 2008 financial crisis and ultimately failed because it could not overcome its internal contradictions. Governments, which transferred the development of the global narrative to corporations, failed to convince the authors of those narratives to support the fulfillment of internal social and environmental tasks.
Today, the world rejects globalization, but it is completely unclear what will replace it. One of the new systems of economic policy that I called "productivism" emphasizes the role of the state in solving problems of inequality, public health and the transition to clean energy. Bringing these neglected tasks to the fore, productivism establishes domestic political priorities, but without hostility towards an open world economy. The Bretton Woods regime has already shown that policies supporting a cohesive economy on at the national level, they can simultaneously promote the development of international trade and long-term capital flows.
We could call the second new paradigm hyperrealism, after the so-called "realist" school of international relations. In that system, the emphasis is on the geopolitical rivalry between the US and China, and the zero-sum logic is used for economic relations between the great powers. The system of hyperrealism does not consider economic interdependence as a source of mutual benefit, but as a weapon that can be used against the enemy, as, for example, America did when it blocked Chinese companies' access to advanced semiconductors and equipment for their production with export controls.
The future path of the world economy will depend on how these competing frameworks will develop in themselves and in relation to each other. Given that they intersect when it comes to trade, in the next few years governments are likely to take more protectionist approaches and more actively support reshoring policies and adopt other industrial policy measures that contribute to the development of advanced production technologies. In addition, governments will more actively choose those green policies that favor domestic producers (an example of this is the US Anti-Inflation Act) or raise barriers at borders (as the EU does through its Carbon Border Adjustment Mechanism). Such policies would serve both domestic and foreign political agendas.
But in the end, most likely, geopolitical reasons will push aside all others, which will allow the hyperrealist narrative to prevail. For example, it is not yet clear whether the emphasis on the development of advanced manufacturing, which characterizes today's industrial policies, will help reduce inequality within individual countries because jobs in the future are most likely to appear in the service sector, which has little to do with competition in China.
If the establishment in the national security services of the major powers is allowed to take control of the economic narrative, it will put global stability at risk. The result may be a more dangerous world in which the ever-present threat of a military conflict between the US and China will force smaller countries to choose a side in that struggle that does not promote their interests at all.
Today we have a unique chance to correct the bad sides of hyperglobalization and build a better international order based on a vision of shared prosperity. We must not allow the great powers to miss this chance.
The author is a professor of international political economy at Harvard University
Copyright: Project Syndicate, 2023.
Translation: NR
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