What's next for globalisation?

The narrative that underpins the current global economic system is in the midst of a transformative plot twist. Since the end of World War II, the so-called liberal international order has been premised on the free flow of goods, capital, and finance, but this arrangement now seems increasingly anachronistic.

Every market order is supported by narratives – stories we tell ourselves about how the system works. This is especially true for the global economy, because, unlike individual countries, the world has no central government acting as rule-maker and enforcer. Taken together, these narratives help create and sustain the norms that keep the system running in an orderly fashion, telling governments what they should and should not do. And, when internalised, these norms undergird global markets in ways that international laws, trade treaties, and multilateral institutions cannot.

Global narratives have shifted numerous times throughout history. Under the late-nineteenth-century gold standard, the global economy was viewed as a self-adjusting, self-equilibrating system in which stability was best achieved when governments did not interfere. Free capital movement, free trade, and sound macroeconomic policies, the thinking went, would achieve the best results for the world economy and individual countries alike.

The collapse of the gold standard, together with the Great Depression, put a significant dent in this benign-markets narrative. The Bretton Woods regime that emerged after World War II, which relied on Keynesian macroeconomic management to stabilise the global economy, gave the state a much more prominent role. Only a strong welfare state could provide social insurance and support those who fell through the cracks of the market economy.

The Bretton Woods system also altered the relationship between domestic and global interests. The world economy, built on a model of shallow integration, was subservient to the goals of ensuring full domestic employment and establishing equitable societies. Thanks to capital controls and a permissive international trade regime, countries could create social and economic institutions that suited their individual preferences and needs.

The neoliberal hyper-globalisation narrative that became dominant in 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. It did, however, acknowledge a critical role for governments: to enforce the specific rules that made the world safe for large corporations and big banks.

The benefits of benign markets were meant to extend beyond economics. The economic gains from hyper-globalisation, neoliberals believed, would help to end international conflict and strengthen democratic forces around the world, especially in communist countries such as China.

The hyper-globalisation narrative neither denied the importance of social equity, environmental protection, and national security, nor contested governments' responsibility to pursue 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 would be possible to have one's cake and eat it. And if the results were disappointing, as they turned out to be, the blame lay not with hyper-globalisation, but with the absence of complementary and supporting policies in other domains.

Hyper-globalisation, in retreat since the 2008 financial crisis, ultimately failed because it could not overcome its inherent contradictions. Ultimately, the governments that gave corporations the power to write the narrative were unlikely to persuade that narrative's authors to support domestic social and environmental agendas.

As the world abandons hyper-globalisation, what will replace it remains highly uncertain. One emerging economic-policy framework, which I have called "productivism," emphasises the role of governments in addressing inequality, public health, and the clean-energy transition. By putting these neglected objectives front and centre, productivism reasserts domestic political priorities without being inimical to an open world economy. The Bretton Woods regime has shown that policies that support cohesive national economies also help promote international trade and long-term capital flows.

Another emerging paradigm could be called hyper-realism, after the "realist" school of international relations. This narrative emphasises the geopolitical rivalry between the United States and China and applies a zero-sum logic to economic relations between major powers. The hyper-realist framework views economic interdependence not as a source of mutual gain but as a weapon that could be wielded to cripple one's adversaries, as the US did when it used export controls to block Chinese companies from accessing advanced semiconductors and the equipment to manufacture them.

The future path of the world economy will depend on how these competing policy frameworks play out on their own and against each other. Given the overlap between the two when it comes to trade, governments will most likely adopt a more protectionist approach over the next few years and increasingly embrace reshoring, as well as other industrial policies that promote advanced manufacturing. Governments will also likely adopt more green policies that favour domestic producers, such as the US Inflation Reduction Act, or erect barriers at the border, as the European Union does through its carbon border adjustment mechanism. Such policies would serve both domestic and foreign-policy agendas.

Ultimately, however, geopolitical considerations will most likely push all other considerations aside, enabling the hyper-realist narrative to prevail. It is not clear, for example, that the focus on advanced manufacturing that characterises the current resurgence of industrial policy will do much to reduce inequality within countries, given that the good jobs of the future are likely to come from service industries that have little to do with the competition against China.

Enabling the national-security establishments of the world's major powers to hijack the economic narrative would endanger global stability. The result could be an increasingly dangerous world in which the ever-present threat of a military conflict between the US and China compels smaller countries to take sides in a fight that does not advance their own interests.

We have a unique opportunity to right the wrongs of hyper-globalisation and establish a better international order based on a vision of shared prosperity. We must not let great powers squander it.

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association.

Disclaimer: This article first appeared on Project Syndicate and has been published by a special syndication arrangement.