A better alternative must be found at the end of hyper-globalization

Every order in the market is supported by the narratives, or stories, that we tell ourselves. This is especially true of the global economy because, unlike countries, there is no central government in the world acting as a rule-maker and enforcer. Taken together, these narratives help to create and maintain the norms that run the system in an orderly manner, telling governments what they should and should not do. And, when assimilated, these norms underpin global markets in ways that international law, trade treaties and multilateral institutions cannot.

Global narratives have changed many times in history. Under the gold standard of the late 19th century, the global economy was viewed as a self-adjusting, self-balancing system in which stability was best achieved by non-intervention by the government. Free capital circulation, free trade and sound macro-economic policies, it was thought, would yield the best results for the world economy and countries alike. The collapse of the gold standard and the Great Depression put a significant dent in this benign-market narrative. 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 more prominent role. Only a strong welfare state can provide social insurance and support those who have fallen through the cracks of the market economy. The Bretton Woods system changed the relationship between domestic and global interests. The world economy, built on a model of shallow integration, was now subordinated to the goals of ensuring full domestic employment and establishing an equitable society. Thanks to capital controls and a permissive international trade regime, countries can create social and economic institutions that suit their individual preferences and needs.

The neoliberal hyper-globalization narrative of the 1990s, with its preference for deep economic integration and the free flow of finance, was in many ways a return to the gold-standard narrative of benign and self-adjusting markets. However, it does acknowledge an important role for governments: to enforce specific rules that make the world safer for big corporations and big banks. The benefits of benign markets were to go beyond economics. The economic benefits from hyper-globalization, neoliberals believed, would help end international conflict and strengthen democratic forces around the world, especially in communist countries such as China.

The hyper-globalization narrative neither negates the importance of social equity, environmental protection and national security, nor opposes the responsibility of governments to advance them. But it assumed that these goals could be achieved through policy instruments that did not interfere with free trade and finance. Simply put, it will be possible to have one’s cake and eat it too. And if the results were disappointing, as they turned out to be, the fault lies not with hyper-globalization but with weak complementary and ancillary policies in other domains.

Hyper-globalization, in retreat since the 2008 financial crisis, ultimately failed because it could not overcome its inherent contradictions. The governments that gave corporations the power to write these fiction were unlikely to persuade their writers to support domestic social and eco-friendly agendas.

As the world leaves hyper-globalization, what will replace it is highly uncertain. An emerging economic-policy framework, which I call ‘productivity’, emphasizes the role of governments in addressing inequality, public health and the clean-energy transition. By placing these neglected objectives front and center, productivity emphasizes domestic political priorities without being counterproductive to an open world economy. The Bretton Woods regime has shown that policies that support united national economies also help promote world trade and capital flows.

Following the ‘realist’ school of international relations, another emerging paradigm can be called hyper-realism. It emphasizes the geopolitical rivalry between the US and China and applies zero-sum logic to economic relations between the major powers. This framework views economic interdependence not as a source of mutual benefit but as a weapon that can cripple adversaries, as the US did when it blocked Chinese firms from making advanced chips and equipment. Export controls were used for

The path of the world economy will depend on how these competing policy frameworks work on their own and against each other. Given the overlap between the two on trade, governments will adopt a more protectionist approach over the next few years and increasingly adopt re-shoring as well as other industrial policies to promote advanced manufacturing. Governments are also likely to adopt more green policies that favor domestic producers, such as the US Inflation Reduction Act, or erect barriers, as the EU does through its Carbon Limit Adjustment Mechanism.

Ultimately, geopolitical objectives will push other views aside, which may allow hyperrealistic narratives to prevail.

For example, it is unclear whether the current focus on advanced manufacturing, which characterizes resurgent industrial policy, will do much to reduce inequality within countries, given that service industries are more likely to create good jobs. Which has little to do with the China rivalry.

Allowing the national-security establishments of major powers to hijack the economic narrative will jeopardize global stability. The result could be a dangerous world in which the threat of armed conflict between the US and China compels other countries to take sides in a fight that does not advance their interests.

Let’s correct the mistakes of hyper-globalization and establish a better global order based on a vision of shared prosperity, don’t let the great powers squander this opportunity. ©2023/Project Syndicate