The narrative underlying the current global economic system is taking a transformative turn. Since the end of the Second World War, the so-called liberal international order has been based on the free movement of goods, capital and finance. But this structure now seems increasingly anachronistic.
Any market order is underpinned by narratives—stories we tell ourselves about how the system works. This applies in particular to the global economy.
Collectively, these narratives help create and maintain norms that keep the system running in an orderly fashion and tell governments what to do and what not to do. And once these norms are internalized, they underpin global markets in a way that international legislation, trade treaties, and multilateral institutions cannot.
Global narratives have changed over the course of history. Under the gold standard of the late 19th century, the world economy was viewed as a self-regulating, self-balancing system in which stability was best achieved through the non-interference of governments.
The collapse of the gold standard combined with the Great Depression put a significant damper on this benign market narrative.
Within the framework of the Bretton Woods regime created after the Second World War, the world economy was stabilized by Keynesian macroeconomics and the state was given a much more important role. Only a strong welfare state can offer social security and support people who fall through the cracks of the market economy.
In the 1990s, the neoliberal narrative of hyper-globalization prevailed, with its preference for deep economic integration and free financial flows. Unlike the gold standard narrative, however, the crucial role of governments in enforcing specific rules that ensured that big corporations and big banks found a safe world for them was recognized. The neoliberals believed that the economic gains of hyperglobalization would help end international conflicts and strengthen democratic forces worldwide.
Ultimately, hyperglobalization failed because it was unable to resolve the inherent contradictions. Ultimately, it was implausible that governments that let corporations develop the narrative would persuade the creators of those narratives to support national social and environmental goals.
In the future, geopolitical goals are likely to shape the new order
As the world turns its back on hyper-globalization, what will take its place remains highly uncertain. An emerging economic policy framework I have dubbed “productivism” emphasizes the role of governments in public health, tackling inequality and the clean energy transition.
In its absolute focus on these neglected goals, productivism affirms domestic political priorities without getting in the way of an open world economy. The Bretton Woods system has shown that policies that support stable economies also support international trade and long-term capital flows.
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Another emerging paradigm could be termed hyperrealism, paraphrasing the “realist” school of international relations. This narrative highlights the geopolitical rivalry between the United States and China and applies zero-sum logic to economic relations between great powers.
The hyper-realistic approach sees economic interdependence not as a basis for mutual benefit, but as a weapon that can be used to cripple adversaries, as the US did when it imposed export controls to deny Chinese companies access to advanced semiconductors and equipment , with which these semiconductors are manufactured.
Governments are likely to pursue increasingly protectionist policies
The future direction of the world economy will depend on how these competing policy frameworks perform individually and in comparison to one another. Given the overlap between the two approaches to trade, governments are likely to adopt a more protectionist approach over the next few years, increasingly supporting de-shoring and other industrial policies to encourage advanced manufacturing.
In addition, governments will probably also increasingly take environmental measures to favor domestic manufacturers, as happened in the USA with the Inflation Reduction Act, for example, or erect barriers at the external borders, as the European Union is doing with its CO2 border adjustment mechanism. Such a policy would serve both domestic and foreign policy purposes.
Eventually, however, geopolitical considerations will most likely eclipse all other considerations, allowing the hyper-realistic narrative to prevail. For example, it is not clear whether the focus on advanced manufacturing that characterizes the current resurgence in industrial policy will do much to reduce inequality within countries. After all, the good jobs of the future will probably be found in the service industries that have little to do with competition from China.
It would be a threat to global stability if the national security apparatuses of the major world powers were allowed to hijack the economic narrative. The result could be an increasingly dangerous world where the ever-present threat of a US-China military conflict is forcing smaller countries to take sides in a struggle that does not further their own interests.
We have a unique opportunity to right the mistakes of hyper-globalization and create a better international order based on a vision of shared prosperity. We must not allow the great powers to squander this opportunity.
The author:
Dani Rodrik is Professor of International Political Economy at Harvard Kennedy School and President of the International Economic Association.
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