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Impossible Trinity in Global Economy
Context:
DANI RODRIK, a professor of international political economy at Harvard Kennedy School, and the author of ‘Straight Talk on Trade: Ideas for a Sane World Economy’ talked about the “political trilemma of the world economy.”
About the Political Trilemma:
- Rodrik’s argument was that advanced globalisation, the nation-state, and mass politics could not coexist indefinitely. Societies would eventually have to choose at most two out of the three.
- He predicted that, in the long run, the nation-state would be the one to give way, though not without a struggle.
- In the short term, governments would likely reassert national sovereignty to address the governance and distributive challenges posed by globalisation.
- He expanded on it in his other book “The Globalisation Paradox.”
- The idea became a useful framework to explain various developments, including the backlash against hyper-globalisation, Brexit, the rise of far-right movements, and the future of democracy within the European Union.
Another Trilemma:
- Recently, another trilemma has captured the author’s attention: the possibility that it may be impossible to simultaneously combat climate change, support the middle class in advanced economies, and reduce global poverty.
- Under current policies, it seems that achieving two of these objectives often comes at the expense of the third.
Challenges:
- Post World War II: In the post-World War II era, both developed and developing countries focused on economic growth and social stability.
- Welfare States: Advanced economies built welfare states while gradually opening their markets to exports from poorer nations, as long as the social and distributive consequences remained manageable.
- This strategy led to inclusive growth in rich countries and poverty reduction in developing nations pursuing sound policies.
- Ignored Climate Threat: However, this approach largely ignored the looming threat of climate change.
- Economic growth, driven by fossil fuels, eventually led to increasingly evident environmental consequences.
- Furthermore, the post-war social-democratic compromise in advanced economies unravelled due to the contradictions inherent in the author’s original trilemma. Hyper-globalisation displaced the Bretton Woods system, disrupting labour markets in rich nations and undermining both the middle class and democracy.
- New Strategies: Addressing these challenges required new strategies.
- In response, U.S. President Joe Biden’s administration has taken significant steps. It has introduced substantial investments in renewable energy and green industries to combat climate change while aiming to revitalise the middle class by boosting labour’s bargaining power, reshoring manufacturing, and creating jobs in areas hard-hit by Chinese imports.
- Challenges for Developing Countries: While this focus on climate and the middle class is overdue, it presents challenges for developing countries.
- Poorer nations see the recent wave of industrial policies and regulations in the U.S. and Europe as a threat to their development prospects.
- For instance, green subsidies in the U.S. favour domestic over imported goods, while the European Union’s carbon-pricing mechanism will impose tariffs on “dirty” exports from developing nations.
- Poorer countries fear these measures could undermine their attempts to follow the export-oriented industrialisation model that once fueled East Asia’s success.
Way Forward:
- A Policy Mix: One alternative could be a policy mix that emphasises both the needs of developing countries and the climate. Such a strategy, inspired by philosopher John Rawls’ principles of justice, has moral appeal.
- This would require significant transfers of financial and technological resources from the Global North to the South to ensure investments in climate adaptation and mitigation.
- It would also necessitate greater access to Northern markets for goods, services, and workers from poorer countries, thus enhancing economic opportunities for workers in the South.
- Cooperation from Developing Countries: Addressing climate change is impossible without cooperation from developing countries, where emissions are rising rapidly.
- Encouraging green-transition policies that align with the growth strategies of these nations is not just morally right but also in the self-interest of richer countries.