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Hyper-globalization should end with a better alternative

Context

  • The free flow of goods, capital, and finance has been the cornerstone of the so-called liberal international order since the end of World War II, but this global system is beginning to look dated.
    • As a result, it appears that the story that drives the global economic system is undergoing a transformative plot twist.

Relevance

GS Paper-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Mains Question

What are the primary negative effects of hyper-globalization? Discuss alternative microeconomic frameworks to the current hyper-globalization thesis for better economic stability. (250 Words).


Key Points

  • Each market order is backed up by a variety of stories.
  • This is particularly true for the world economy because there isn’t a centralised authority that sets laws and upholds them.
  • Together, these narratives tell governments what they should and shouldn’t do, helping to establish and maintain the norms that keep the system functioning in an orderly manner.

History of Global Narratives for Economy

  • Gold Standard Narrative: o During the late 19th-century gold standard, the world economy was seen as a self-correcting, self-equilibrating system, where stability was best attained by avoiding government intervention.
  • In that system, sound macroeconomic policies, free trade, and capital mobility would produce the best outcomes for both the global economy and individual nations.
    • The demise of the gold standard and the Great Depression severely damaged the benign-markets thesis.
  • Bretton Woods Regime:
    • To stabilise the world economy after World War II, Keynesian macroeconomic management based on this regime emerged.
    • It made the state play a much bigger role.
    • According to the new administration, only a robust welfare state could offer social insurance and support those who were left behind by the market economy.
    • The Bretton Woods system changed the dynamic between national and international interests.
    • The objectives of guaranteeing full domestic employment and establishing just societies were now more important than the global economy.
    • Countries could develop social and economic institutions that suited their unique preferences and needs thanks to capital controls and a permissive international trade regime.
      • Hyper-globalization Narrative: o With its preference for deep economic integration and the free flow of finance, the neoliberal hyper-globalization narrative that dominated in the 1990s was in many ways a return to the gold-standard narrative of benign and self-adjusting markets.
    • It did, however, recognise that governments play a crucial role in enforcing the specific laws that make the world safe for big businesses and big banks.
    • The advantages of peaceful markets were designed to go beyond matters of commerce.
  • Neoliberals believed that the economic benefits of hyper-globalization would strengthen democratic forces worldwide, especially in communist nations like China, and help to put an end to international conflict.
    • Neither the importance of social justice, environmental preservation, or national security, nor the duty of governments to pursue these goals was contested by the hyper-globalization narrative.
  • However, it was predicated that these objectives could be accomplished through the use of political tools that did not obstruct free trade and financial activity.
    • Due to its inability to resolve its fundamental contradictions, hyper-globalization—which has been in retreat since the 2008 financial crisis—finally failed.

Alternatives to the Current Framework

  • As the world abandons hyper-globalization, what will replace it is still largely unknown; however, there are some emerging economic frameworks that can be used for better economic order.
  • Productivism: It emphasises the part that governments play in addressing issues like inequality, public health, and the switch to clean energy.
  • Productivism reinvigorates domestic political priorities while not harming an open world economy by placing these neglected goals front and centre.
    • The Bretton Woods system demonstrated that policies that foster strong national economies also aid in advancing international trade and capital flows.
  • Hyper-realism: This emphasises the US-China geopolitical rivalry and applies a zero-sum logic to trade negotiations between major powers.
    • According to this framework, economic interdependence can be used as a weapon to weaken rivals rather than as a source of mutual benefit, as the US did when it used export restrictions to prevent Chinese companies from gaining access to cutting-edge chips and the machinery needed to make them.

Way Farward

  • The way forward will depend on how these conflicting policy frameworks perform separately and in opposition to one another.
  • Given the overlap between the two on trade, governments will most likely take a more protectionist stance over the following few years and increasingly support re-shoring as well as other industrial policies to promote advanced manufacturing.
  • Governments will also probably adopt more green policies that support domestic producers, like the US Inflation Reduction Act, or erect barriers, like the EU does through its carbon border adjustment mechanism.
  • The hyper-realist narrative might prevail because geopolitical objectives will probably override other factors.
  • Global stability would be at risk if major powers allowed their national-security apparatuses to take control of the economic narrative.
  • The end result might be a dangerous world where the prospect of a war between the US and China forces other nations to choose sides in a conflict that does not serve their interests.

Conclusion

A better global order based on a vision of shared prosperity is urgently needed in order to correct the wrongs of hyper-globalization.


February 2024
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