The post-1990s era of hyper-globalization is now commonly acknowledged to have come to an end. The Covid-19 pandemic and Russia’s war against Ukraine have relegated global markets to a secondary and at best supporting role behind national objectives – in particular, public health and national security. But all the talk about deglobalization should not blind us to the possibility that the current crisis may in fact produce a better globalization.
In truth, hyper-globalization had been in retreat since the global financial crisis of 2007-08. The share of trade in world GDP began to decline after 2007, as China’s export-to-GDP ratio plummeted by a remarkable 16 percentage points. Global value chains stopped spreading. International capital flows never recovered to their pre-2007 heights. And populist politicians openly hostile to globalization became much more influential in the advanced economies.
Hyper-globalization crumbled under its many contradictions. First, there was a tension between the gains from specialization and the gains from productive diversification. The principle of comparative advantage held that countries should specialize in what they were currently good at producing. But a long line of developmental thinking suggested that governments should instead push national economies to produce what richer countries did. The result was the conflict between the interventionist policies of the most successful economies, notably China, and the “liberal” principles enshrined in the world trading system.
Second, hyper-globalization exacerbated distributional problems in many economies. The inevitable flip side of the gains from trade was the redistribution of income from its losers to its winners. And as globalization deepened, redistribution from losers to winners grew ever larger relative to the net gains. Economists and technocrats who pooh-poohed the central logic of their discipline ended up undermining public confidence in it.
Third, hyper-globalization undermined the accountability of public officials to their electorates. Calls to rewrite globalization’s rules were met with the retort that globalization was immutable and irresistible – “the economic equivalent of a force of nature, like wind or water”, as US President Bill Clinton put it. To those who questioned the prevailing system, UK Prime Minister Tony Blair responded that, “You might as well debate whether autumn should follow summer.”
Fourth, the zero-sum logic of national security and geopolitical competition was antithetical to the positive-sum logic of international economic cooperation. With China’s rise as a geopolitical rival to the United States, and Russia’s invasion of Ukraine, strategic competition has reasserted itself over economics.
With hyper-globalization having collapsed, scenarios for the world economy run the gamut. The worst outcome, recalling the 1930s, would be withdrawal by countries (or groups of countries) into autarky. A less bad, but still ugly, possibility is that the supremacy of geopolitics means that trade wars and economic sanctions become a permanent feature of international trade and finance. The first scenario seems unlikely – the world economy is more interdependent than ever, and the economic costs would be huge – but we certainly cannot rule out the second.
Yet, it is also possible to envisage a good scenario whereby we achieve a better balance between the prerogatives of the nation-state and the requirements of an open economy. Such a rebalancing might enable inclusive prosperity at home and peace and security abroad.
The first step is for policymakers to mend the damage done to economies and societies by hyper-globalization, along with other market-first policies. This will require reviving the spirit of the Bretton Woods era, when the global economy served domestic economic and social goals – full employment, prosperity, and equity – rather than the other way around. Under hyper-globalization, policymakers inverted this logic, with the global economy becoming the end and domestic society the means. International integration then led to domestic disintegration.
Some might worry that emphasizing domestic economic and social objectives would undermine economic openness. In reality, shared prosperity makes societies more secure and more likely to countenance openness to the world. A key lesson of economic theory is that trade benefits a country as a whole, but only as long as distributive concerns are addressed. It is in the self-interest of well-managed, well-ordered countries to be open. This is also the lesson of actual experience under the Bretton Woods system, when trade and long-term investment increased significantly.
A second important prerequisite for the good scenario is that countries do not turn a legitimate quest for national security into aggression against others. Russia may have had reasonable concerns about NATO enlargement, but its war in Ukraine is a completely disproportionate response that will likely leave Russia less secure and less prosperous in the long run.
For great powers, and the US in particular, this means acknowledging multipolarity and abandoning the quest for global supremacy. The US tends to regard American predominance in global affairs as the natural state of affairs. In this view, China’s economic and technological advances are inherently and self-evidently a threat, and the bilateral relationship is reduced to a zero-sum game.
Leaving aside the question of whether the US can actually prevent China’s relative rise, this mindset is both dangerous and unproductive. For one thing, it exacerbates the security dilemma: American policies designed to undermine Chinese firms such as Huawei are likely to make China feel threatened and respond in ways that validate US fears of Chinese expansionism. A zero-sum outlook also makes it more difficult to reap the mutual gains from cooperation in areas such as climate change and global public health, while acknowledging that there will necessarily be competition in many other domains.
In short, our future world need not be one where geopolitics trumps everything else and countries (or regional blocs) minimize their economic interactions with one another. If that dystopian scenario does materialize, it will not be due to systemic forces outside our control. As with hyper-globalization, it will be because we made the wrong choices.
Dani Rodrik is a professor of international political economy at Harvard University’s John F. Kennedy School of Government and the president of the International Economic Association.
Copyright: Project Syndicate