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Olivér Hortay - Barna Péterfi
02/05/2024 09:00
According to Harvard economist Dani Rodrik, the "central story" of the global economic system is undergoing a radical transformation. The neoliberal approach that has dominated for decades, based on the free flow of capital and goods and market competition, is collapsing and is being replaced by a new narrative that is taking shape today. In the "productivist" scenario, the role of national governments is enhanced, but cooperation between them allows the maintenance of an open world economy based on mutually beneficial relations, i.e. actors continue to see their relations with each other as a source of profit. However, in a "hyper-realist" scenario, the strengthening nation states will use interdependence as a weapon to paralyse their competitors and thus gain geopolitical supremacy.
This "hyper-realistic" scenario is likely to have significant costs for the global economy as a whole: the IMF estimates that it could reduce global output by up to seven per cent in the long term. The strategy of trade decoupling is therefore at best a winning situation in relative terms, i.e. compared to other players, as they have to share a cake of diminishing size. Yet it seems that the Western alliance system has chosen the "hyper-realistic" option and is gradually shifting its sanctions policy from Russia to China, which can hardly be justified by the Russia-Ukraine war. The only reasonable explanation for the efforts of pro-sanctions Western leaders to upset the status quo that previously ensured the alliance's economic supremacy is that they fear that the free flow of goods and market competition could in future cause greater damage than the costs of bloc formation.
The fear is that globalisation, dismantling of borders and competition favour the stronger players, and that the main competitor, China, has in recent years built up a dominant market position in several important industries (e.g. green technologies). The former neo-liberal order has therefore started to work against the West in these areas, and some policy makers have responded by immediately burning bridges. However, it is now clear that the world outside the Western alliance is not following the West, and the West is forced to maintain more and more fronts simultaneously, so that the chances of relative gains are diminishing.
According to Rodrik, bloc formation makes the world as a whole more dangerous, forcing smaller countries to choose sides in a struggle that is in itself contrary to their interests. But beyond the damage to global prosperity and small countries, it increasingly seems that an escalation of trade conflict could make the Western alliance system as a whole lose out, in relative terms. It is therefore appropriate to change the sanctions regime and build the new economic story on a vision of mutually beneficial cooperation and shared prosperity.
Olivér Hortay is Head of the Energy and Climate Policy Division at the Századvég Economic Research Institute
Barna Péterfi is an adviser at the Századvég Economic Research Institute
