## Addressing Challenges of a New Era

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### Neoliberalism and the role of economics
- Mainstream economics in recent decades became closely associated with a policy paradigm labeled “neoliberalism,” which favors expanding the scope of markets (including global markets) and restricting the role of government action.
- The neoliberal approach widened inequality within nations, did little to promote the climate transition, and created blind spots including global public health and supply-chain resilience.
- Despite neoliberal dominance, record economic growth in many developing economies brought a massive reduction in extreme poverty; the best-performing countries, such as China, combined markets with industrial policies, state enterprises, and capital controls rather than adhering strictly to neoliberal rules.
- The neoliberal paradigm was rooted in a belief in a few simple, universal rules of thumb that could be applied everywhere; this was described as “bad economics.”
- Economics is characterized as a way of thinking rather than a set of policy recommendations; first-order principles (thinking at the margin, aligning private incentives with social costs and benefits, fiscal sustainability, sound money) are abstract and do not map into unique remedies.
- The valid economic answer to many policy questions is “it depends.” Economic analysis should scrutinize contextual dependence and second-best constraints.

### Middle class erosion and the future of work
- If climate change is the most severe threat to the physical environment, the erosion of the middle class is the most significant threat to the social environment.
- Healthy societies and polities require a broad-based middle class; historically, well-paying, secure jobs in manufacturing and related services were the foundation of a growing middle class.
- Recent decades have produced labor market polarization and a shortage of good jobs in advanced economies due to hyperglobalization, automation, skill-biased technological change, and austerity policies.
- Policy implications:
  - Creation of good jobs must be front and center, addressing both demand-side (firms and technologies) and supply-side (skills, training).
  - Policies must target services in particular, since most future employment opportunities will be generated there.
  - Policies must be oriented toward productivity, which is essential for good jobs for less-educated workers and complementary to minimum wages and labor regulations.
  - Experimentation with novel policies is required—effectively developing industrial policies for labor-absorbing services.

### Climate change and green transition policy realism
- The economist’s first-best solution to climate change would be global coordination around:
  - a high enough global carbon price (or equivalent cap-and-trade system),
  - global subsidies for innovation in green technologies,
  - a substantial flow of financial resources to developing economies.
- The real world of sovereign nations is unlikely to deliver a first-best global solution.
- Adoption of green policies will require messy domestic political bargains; nations will prioritize commercial considerations and bring opponents and potential losers on board.
- Examples: China’s industrial policies to promote solar and wind reduced renewables prices sharply; the Inflation Reduction Act in the US and the Carbon Border Adjustment Mechanism in the EU reflect domestic political bargains that shift some costs to other countries.
- Economists must move beyond first-best purism and be imaginative in crafting solutions that address second-best and political constraints.

### Developing economies and premature deindustrialization
- Developing economies face premature deindustrialization: peak levels of formal employment in manufacturing are being reached at much lower levels of income, and employment deindustrialization sets in much earlier.
- Causes: competition in global markets requires technologies that are increasingly skill- and capital-intensive.
- Consequences:
  - Prevents low-income countries from replicating past export-oriented industrialization strategies.
  - Growth through integration into world markets no longer works when tradables sectors are highly demanding in terms of skills and capital.
- Implication: developing economies must rely less on industrialization and more on productive employment in services, including nontradable services dominated by very small firms.
- Policy need: entirely new, untested services-oriented development strategies; economists must be open-minded and innovative.

### Globalization’s rebalancing and rules for the global economy
- Hyperglobalization has been undermined by distributional struggles, emphasis on resilience, and geopolitical competition between the US and China.
- We are in the midst of a rebalancing between the demands of the global economy and competing domestic economic, social, and political obligations.
- Historical comparison: During the Bretton Woods period, national economic management was less restrained by global rules and yet international trade and long-term investment rose significantly; countries that pursued appropriate strategies (East Asian Tigers) did well despite higher levels of protection in advanced-economy markets.
- A similar positive outcome is possible if major powers avoid viewing the global economy through a purely zero-sum geopolitical lens.
- Economists can help design new rules to assist governments in attending to domestic agendas while avoiding explicitly beggar-thy-neighbor policies.
- Useful analytical starting point: the trade-off between the gains from trade and the gains from national institutional diversity—maximizing one undermines the other; “corner solutions” are rarely optimal.
- Economists should clarify which domains require global cooperation and which should prioritize national action (trade, finance, digital economy).

### A new compass for economics: human flourishing on a thriving, living planet
- Renewal of economics requires a new compass and map fit for contemporary social and ecological crises.
- Quoting John Maynard Keynes (1938): “Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.”
- Last century’s focus on growth made GDP the economist’s compass, depicting progress as an exponential curve measured by a single monetary metric.
- Economists must offer concrete, context-sensitive solutions to central problems: speeding the climate transition, creating inclusive economies, promoting development in poorer nations—while avoiding cookie-cutter Econ 101 prescriptions.
- Final normative claim: “Economics can help only if it expands our collective imagination instead of reining it in.”

*Dani Rodrik, Ford Foundation Professor of International Political Economy, Harvard Kennedy School; past president of the International Economic Association.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/rodrik.pdf_