Date: 18/03/2023

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

Key Phrases: Economic Narratives, Gold standard, Bretton Woods Regime, Neo-liberal Hyper-globalization, International Laws, Multipolar World, Great Depression, Protectionism, Balancing Behaviour, Neoliberal Consensus.

Context:

• 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has been premised on the free flow of goods, capital and finance, but this global arrangement now seems increasingly outdated.
  • Therefore, it seems that narrative which underpins the global economic system is in the midst of a transformative plot twist.

Key Highlights:

• Every market order is supported by numerous narratives.
  • This is especially true for the global economy because 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 shouldn’t do.

History of Global Narratives for Economy:

• Gold Standard Narrative :
  • Under the late-19th-century gold standard, the global economy was viewed as a self-adjusting, self-equilibrating system in which stability was best achieved if governments did not interfere.
  • In that system, Free capital movement, free trade and sound macro- economic policies, would achieve the best results for the world economy and countries alike.
  • The gold standard’s collapse and the Great Depression put a significant dent in this benign-markets narrative.
• Bretton Woods Regime :
  • After World War II, Keynesian macroeconomic management based on the Bretton Woods regime emerged to stabilize the global economy.
  • It gave the state a much more prominent role.
  • As per the new regime, 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 altered the relationship between domestic and global interests.
  • The world economy was now subservient to the goals of ensuring full domestic employment and establishing equitable societies.
  • Because of capital controls and a permissive international trade regime, countries could create social and economic institutions that suited their individual preferences and needs.
• Hyper-globalization Narrative :
  • The neoliberal hyper-globalization 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.
  • However, It acknowledged a critical role for governments for enforcing 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-globalization, neoliberals believed, would help to end international conflict and strengthen democratic forces around the world, especially in communist countries such as China.
  • The hyper-globalization 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.
  • Hyper-globalization, in retreat since the 2008 financial crisis, ultimately failed because it could not overcome its inherent contradictions.

Alternatives for existing Framework:

• As the world abandons hyper-globalization, what will replace it remains highly uncertain.
• But there are some emerging economic frameworks which can be utilized for better economic order.
• Productivism:
  • It emphasizes 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 detrimental to an open world economy.
  • The Bretton Woods regime has shown that policies that support cohesive national economies also help promote world trade and capital flows.
• Hyper-realism:
  • This emphasizes the geopolitical rivalry between the US and China and applies a zero-sum logic to economic relations between major powers.
  • This framework views economic interdependence not as a source of mutual gain but as a weapon that could be wielded to cripple adversaries, as the US did when it used export controls to block Chinese firms from accessing advanced chips and equipment to make them.

Way Forward:

• The 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 on trade, governments will most likely adopt a more protectionist approach over the next few years and increasingly embrace re-shoring as well as other industrial policies to promote advanced manufacturing.
• Governments will also likely 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 border adjustment mechanism.
• Geopolitical aims will likely push other considerations aside, which may let the hyper-realist narrative prevail.
• Letting the national-security establishments of major powers hijack the economic narrative would endanger 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.

Conclusion:

• It is the need of hour to correct the wrongs of hyper-globalization and establish a better global order based on a vision of shared prosperity.

Source: Live-Mint

Mains Question:

Q. What are the major drawbacks of hyper-globalization? Also, discuss some microeconomic frameworks to replace the existing hyper-globalization narrative for better economic order. (250 Words).