A new trilemma stalks the global economy

In 2000 I wrote a article about what I called “the political trilemma of the world economy.” I argued there that globalization in its advanced forms, the nation-state and mass politics cannot coexist. At some point, societies will settle for (at most) two of the three.

Then I proposed that in the long term, the one that would end up giving in would be the nation-state (but not without a fight). In the short term, the most likely consequence was that governments would seek to reassert national sovereignty to address the distributional and governance challenges posed by globalization.

To my surprise, the trilemma proved to have a long life. In a book I published a decade later, The paradox of globalizationI developed the idea better. The concept of the trilemma has become a practical way of understanding the reaction against hyperglobalizationthe exit of the United Kingdom from the European Unionhe rise of the far right and the future of democracy in the EUamong other topics.

Lately I have been concerned about another trilemma: the disturbing possibility that combating climate change, strengthening the middle class in advanced economies and reducing global poverty all at the same time is impossible. On the current policy path, any combination of two of these objectives seems to be detrimental to the third.

In the early postwar decades, policymaking in developed and developing countries alike emphasized economic growth and domestic social stability. Advanced economies created large welfare states, but they also opened their markets to the exports of poorer countries, as long as the distributional and social consequences were manageable. The result was inclusive growth in rich countries and significant poverty reduction in developing countries that implemented the right policies.

Although the strategy was successful, it did not take into account the risks of climate change. But over time, it has become increasingly difficult to ignore the consequences of fossil fuel-based economic growth.

The internal contradictions generated by my original trilemma contributed to further dismantling the post-war Keynesian-social democratic pact in the advanced economies. As hyperglobalization replaced the previous Bretton Woods model, advanced economies experienced major disruptions in their labor markets that weakened the middle class and even democracy. Both phenomena demanded new strategies.

In the United States, the government of the president Joe Biden decided to face the new realities head-on, with an innovative policy that promotes substantial investment in renewable energy sources and green industries to combat climate change. And it explicitly aims to restore the middle class, by promoting workers’ bargaining power, repatriating factories and creating jobs in regions that were most affected by Chinese imports.

This new emphasis on the climate and the middle class is long overdue. But what authorities in the United States and Europe see as a necessary response to the failures of neoliberalism, seems to poor countries to be an attack on their development possibilities. The latest round of industrial policies and regulations are often discriminatory and create barriers to the entry of products manufactured in developing countries.

Green subsidies in the United States encourage the use of local inputs rather than imported ones. He carbon pricing mechanism The EU will soon impose additional tariffs on “dirty” exporters from developing countries. Governments in poor countries believe that these measures will frustrate their attempts to replicate the export-oriented industrialization model applied by East Asian nations.

It is possible to imagine another policy mix, focused on poor countries and the climate. But this would mean a large transfer of resources (financial and technological) from the north to the south, to ensure in the latter the necessary investments in adaptation and mitigation measures against climate change.

It would also demand much more access to northern markets for goods, services and workers from poor southern countries, so as to improve the economic opportunities of those workers. This policy configuration is ethically attractive: it would in practice be a global-scale application of the principles of justice of the philosopher John Rawls.

But here the trilemma appears once again. The aforementioned combination would oppose the imperative of rebuilding the middle class of advanced economies. It would intensify competition for workers without college or university degrees and reduce their wages. It would also reduce the availability of fiscal resources to invest in human capital and physical infrastructure.

Luckily, some of these tensions are more apparent than real. In particular, in both advanced economies and poor countries, policymakers must understand that in the future, most quality middle-class employment will not come from industrial production. but from the service sector. And in developing economies, the creation of more productive jobs in that sector It will also be the main engine of economic growth and poverty reduction.

Sectors with the capacity to absorb labor (such as care, retail, education and other personal services) are mostly non-tradable. His promotion It does not create trade tensions as happens with manufacturing industries. In other words, the conflict between the imperative of promoting the middle class in advanced economies and that of promoting growth in poor countries is not as serious as it seems.

Furthermore, addressing climate change without a significant degree of cooperation from developing countries is practically impossible. While emissions from the United States and Europe decline, those from developing countries continue to rise (rapidly, in some cases), and will soon overcome 50% of global emissions (not counting China). So it is in the interest of rich countries to promote decarbonization policies that poor countries see as part of their own growth strategies rather than as a mere cost.

Climate change is an existential threat. A large and stable middle class is the foundation of liberal democracies. And reducing global poverty is an ethical imperative. It would be alarming to have to abandon any of these three objectives. But the current policy formulation framework imposes, implicitly but forcefully, a trilemma whose solution does not seem easy. To achieve a successful post-neoliberal transition we have to formulate new policies that transcend these tensions.

Copyright: Project Syndicate, 2024.
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