Another turbulent year confirmed that the global economy is at a turning point. We face four major challenges: climate change, the problem of good jobs, the economic and development crisis and the search for a new, healthier form of globalization. To address each, we must abandon established ways of thinking and seek creative, workable solutions, while recognizing that these efforts will necessarily be uncoordinated and experimental.
Climate change is the most difficult challenge and the one that has been ignored for the longest time - at great cost. If we want to avoid condemning humanity to a dystopian future, we must work quickly to decarbonize the global economy. We have long known that we must get rid of fossil fuels, develop cleaner alternatives, and strengthen our defenses against the lasting environmental damage already caused by past inaction. However, it has become clear that little can be achieved through global cooperation or the policies favored by economists.
Instead, individual countries will move forward with their own green agendas, implementing policies that best suit their particular political constraints, as the United States, China and the European Union are already doing. The result will be a mix of emissions caps, tax incentives, R&D support and green industry policies with little global coherence and occasional costs to other countries. As messy as it may seem, an uncoordinated push for climate action may be the best we can realistically hope for.
But our physical environment is not the only threat we face. Inequality, the erosion of the middle class and the polarization of the labor market have caused equally significant damage to our social environment. By now, the consequences of this are very obvious. The consequences are now very obvious. Economic, regional and cultural gaps within countries are widening, and liberal democracy (and the values that support it) seem to be in decline, as reflected in growing support for xenophobic, authoritarian populists and also growing negative reactions to scientific and technological expertise.
Social benefits and the welfare state can help, but what is most needed is an increase in the supply of good jobs for less educated workers who have lost access to them. We need more productive and well-paying employment opportunities that can provide dignity and social acceptance to those without a college degree. The expanded offer of such jobs will require not only increased investments in education and stronger protection of workers' rights, but also a new brand of industrial policy in the service sector, where most jobs will be created in the future.
The loss of manufacturing jobs over time reflects both increased automation and increased global competition. Developing countries are not immune to any of these factors. Many of them face "premature deindustrialization": very few workers are now employed in formal, productive manufacturing companies, meaning they are unable to follow the export-led development strategy that has been so effective in East Asia and some other countries. Together with the challenge of climate change, this crisis of growth strategy in low-income countries requires a completely new development model.
As in developed economies, services will become a major source of job creation in low- and middle-income countries. However, most service sectors in these countries are dominated by very small, informal enterprises - often individual entrepreneurs - and there are essentially no ready-made service-based development models. Governments will need to experiment with combining investments in the green transition and increasing productivity in labour-intensive services.
Finally, globalization itself needs to be reinvented. The post-1990 pattern of hyperglobalization has given way to increased geopolitical rivalry between the US and China, as well as an increased prioritization of domestic social, economic, environmental, and public health issues. Globalization as we know it is no longer fit for purpose and must be replaced by a new understanding that balances national needs with the demands of a healthy global economy that facilitates international trade and long-term foreign investment.
It is also likely that the new model of globalization will be less intrusive, respecting the needs of all countries (not only the great powers) that want greater policy flexibility to solve domestic problems and national security imperatives. One possibility is that the US or China will view their security needs too expansively, seeking global primacy (in the case of the US) or regional dominance (in the case of China). The result will be the "weaponization" of economic interdependence and significant economic decoupling, with trade and investment seen as a zero-sum game.
But a more favorable scenario is also possible, in which both powers keep their geopolitical ambitions in check, realizing that their competing economic goals are better achieved through compromise and cooperation. Such a scenario could serve the global economy well, even if—or perhaps because of—it does not lend itself to hyperglobalization. As the Bretton Woods era demonstrated, significant expansions in global trade and investment are compatible with a "thin" model of globalization in which countries retain significant political autonomy to promote social cohesion and economic growth at home. The greatest gift that great powers can give to the global economy is to manage their domestic economies well.
All these challenges require new ideas and structures. We shouldn't throw traditional economics out the window, but economists, in order to remain relevant, must learn to apply the tools of their profession in a way that fits the goals and constraints of today. They must be open to experimentation and support government actions that do not conform to the usual scenarios of the past.
The author is a professor of international political economy at the Kennedy School of Harvard University; is the president of the International Economic Association
Copyright: Project Syndicate, 2024. (translation: NR)
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