China, Russia, Brazil, South Africa, and now even Trump, they all want to end the current, US designed, global economic order and replace it with something new.
A multi-polar global order
Specifically, Brazil’s president Lula has called for ‘inclusive multipolarity’ where non-western nations have a bigger say in global affairs and where Western powers stop meddling in foreign countries. This vision seems to closely align with that of Trump, in which the US stops policing the world as it rebuilds its struggling industries. At the same time, most economists and leaders of rich small nations warn of impending doom. For example, Singapore’s prime minister recently said that:
“””the era of rules-based globalization and free trade is over we are entering a new phase one that is more arbitrary protectionist and dangerous.”””
So, which one is it? Will the multi-polar order be more fair and prosperous, or will it be more protectionist and dangerous?
In other words, what can we actually expect from a new multipolar global economy?
To answer that question, I went beyond the noise of the headlines and dug into the forgotten field of geo-economics, which can elegantly explain big issues economists often get wrong like why both sanctions and foreign aid are much more effective than you think. Remarkably, geo-economics does NOT tell us that the multi-polar order will be a DISASTER, for sure. But, crucially, it will depend on WHAT TYPE of multi-polar order we end up with. Will it be a new free-for-all like the one Russia envisions? Will it be an inclusive rules based order like the one Brazil and South Africa want? Or, will we end up with something similar to what we saw in the cold war? Which scenario we end up with does NOT JUST shape global POLITICS— it has drastic implications for inflation, supply chain chaos, and whether or not there will be many more economic crises.
Yes, in this video, we’ll go through each of these scenario’s, their consequences, and then evaluate which one is more likely. But, to properly do so, let’s first get into a quick lesson on
Geo-economics 101
What is geo-economics? According to Yale economist dr. Christopher Clayton and his co-authors geo-economics is the study about how countries use their:
“””economic strength to exert influence on foreign entities to achieve geopolitical or economic goals.“””
As you can imagine, there are only a few countries that actually have the economic strength to do this. These are hegemons. Hegemons are DIFFERENT from other countries, who have control over their OWN firms and citizens, in that hegemons have
“””the ability to induce an entity, be it a foreign government or firm, to take an action that it would otherwise NOT want to take.“””
They can do this in two ways. The first is by
“””threatening NEGATIVE consequences if the target does not undertake the desired actions “””
and the second is by
“””by promising POSITIVE benefits.“””
For example, in 2020, China imposed several tariffs on Australian imports, just after it called for an international investigation into the origins of Covid-19. These are negative economic consequences China imposed for doing something China did not like. On the other hand, China has rewarded countries with positive benefits such as loans and investments through the Belt-and-Road initiative, if these countries allowed Chinese firms to control strategic ports and other infrastructure. Similarly, the US famously gave loans and grants to European countries that resisted communism under the Marshall plan, and is now threatening China with sky-high tariffs, if it doesn’t stop subsidizing key domestic industries.
But, as you may have noticed, only some of these threats and rewards produced the desired outcome. For example, the Marshall plan DID, arguably, stop the spread of communism in Europe. However, China’s tariff against Australia did NOT significantly change Australia’s behavior, and China quietly dropped them in 2024.
So, why are SOME threats and positive benefits successful while others are not?
Well, following the logic of geo-economics, countries that are targeted by a hegemon essentially have two options. The first is the inside option, and the second is the outside option.
If a country chooses to be inside the hegemon’s system, it may get certain benefits, like better market access, or access to loans in the hegemon’s currency. But, in return, the country will have to undertake political actions that the hegemon wants it to do. These could be economic actions, like for example, respecting intellectual property, or respecting foreign courts if they order your country to repay US investors. But, the hegemon may also demand political actions, such as joining the it in a war against a foreign country, or voting alongside it in the UN.
If the target country would not have chosen this action on its own, such a request will have a negative value.
However, the target country knows that if it refuses the request, it will end up outside the hegemon’s system. This means that it will loose rewards such a preferred market access or preferred access to loans.
To make matters worse, if it chooses the outside option, it will likely face negative consequences such as sanctions or tariffs.
So, for each request, the target country compares the value of staying inside the system versus the cost of being outside it. For example, in the case you see here, the hegemon’s request is more costly than all the rewards that the target country receives inside the system. But, thanks to the threat of sanctions and tariffs, the target country chooses to comply and remain inside the hegemon’s system anyway.
This geo-economic framework can help us understand why great powers often take actions that make little sense from a purely economic perspective. Specifically, I found three geo-economic insights that helped me rewire my economist brain to make more sense of the multi-polar world order.
The first is that foreign aid is more useful than economists give it credit for. Every so often economists argue that aid from one state to another has failed to make developing countries richer. Take the billions that the US has sent to Egypt for example. USaid used to claim that it
“helped Egypt become a “success story in economic development”
But, it rightly got criticized for that by economists because there is really very little evidence to back that up. However, USaid to Egypt makes total sense if we look at it through a geo-economic lens as USaid raised the value of the inside option for Egypt, leading it to stray away from the Soviet Union’s economic system, and later making it hard to refuse the US’s requests to make peace with Israel.
The second way geo-economics gave me a new perspective was by challenging the narrative that sanctions are largely ineffective because they DON’t get countries to do what you want. Did North Korea, Iran, or even Russia suddenly comply with US political demands after being sanctioned? No. But, if we follow the geo-economics framework, we can see that these sanctions did signal to all other countries that stepping out of the US led system would be very expensive indeed.
After all, as dr. Clayton and his colleagues write:
“””if the hegemon does not carry out its threat against one entity today, then other entities may think they will also be let off the hook in the future.“””
Thirdly, and finally, geoeconomics tells us that being a successful economic hegemon is not just about being a big strong independent economy. It is just as much about being the best at coalition and institution building. That is, geo-economists recognize that a hegemon is much more powerful if it can get a coalition of countries to go along with it. Similarly, they recognize that international institutions are
“””closely influenced by the hegemon.“””
This could explain why, despite staying at roughly the same percentage of global output in Dollars, US global power has waned. Crucially, it was not the US economy. It was that the U.S.’s main coalition partners, Europe and Japan became far less economically important.
So, the inside option of being inside the US led order is now less attractive and the outside option less painful because the U.S. coalition is far less powerful. Indeed, as dr. Clayton and his co-authors note, U.S. coalition sanctions against Russia were far less painful then they could have been because the coalition
“””did not include China and India. “””
which were large alternative buyers for Russian energy.
These insights from geo-economics are crucial, I believe, to getter better idea about
What the multi-polar global order will actually look like
where, first, we need to clarify that in all historical global orders there are economic hegemonS, plural. But, in a uni-polar global order, the world is dominated by ONE hegemon, whereas in a multi-polar global order it is dominated by multiple hegemons.
So, what is the economic effect of switching from a uni-polar to multi-polar global order?
The geo-economics papers I read contained two key predictions. The first prediction is that multi-polar worlds tend to be less globalized. Specifically, as you can see here, in a uni-polar world order, global trade tends to go up and money moves across borders more easily.
The simple explanation for this is that if a hegemon’s coalition is strong enough, it will be extremely expensive for countries to deny its political requests.
This then leads us to our second prediction, which comes from an economic model by professor Fernando Broner and his co-authors, which predicts that
“””only a hegemon of intermediate size will use threats“””
The reason for this is that small hegemons do not really have the economic power to threaten others. On the other hand, a super dominant hegemon doesn’t often need to threaten anyone, because its already really clear to everyone how powerful it is.
So, the second prediction is that in the multipolar order, which by definition has more intermediate hegemons, more economic threats will be made and acted upon. These can be negative threats, like tariffs and sanctions. But, crucially, they can also be positive threats, like giving aid and loans to countries which can then later be removed if countries do not follow the hegemon.
These two predictions can explain why Singapore’s prime minister was so pessimistic about the new global order. Singapore is NOT a hegemon AND it is very dependent on both global trade and finance. On the other hand, bigger nations like Brazil, Russia, India and China are logically more optimistic, as they have far larger home markets.
However, as history shows, they may be careful what they wish for, as some of these countries have benefitted tremendously from globalization. Meanwhile others have a naive vision about what a multi-polar world will actually look like. So, what do these visions look like, and how likely are we to get them? Let’s have a look at
3 plausible scenario’s
and how likely it is that we get each of them. These 3 scenario’s differ primarily in terms of how deglobalized the world will become and how likely it is we will see more economic conflict.
On the left-hand side of the spectrum, there’s the Russian vision in which all great powers have their own “spheres of influence”, where they can freely use economic, and non-economic, threats to maintain leadership over these countries. However, as we’ve seen with Ukraine, the South China or now with Kashmir, great powers do NOT agree on the borders of these spheres of influence. Therefore, I expect that if the Russians get their way, we will see a lot more economic threats materialize, especially between rival powers and countries at their peripheries. This is similar to what we saw in the 1930s and could bring economic trade and finance crashing down. This is Singapore’s horror scenario.
To counterbalance this, there’s the second scenario, which Brazil’s president Lula has called ‘inclusive multi-polarity.’ In this scenario, South Africa’s president Cyrill Ramaphose has said that
“””we reiterate our commitment to inclusive multilateralism and upholding international law“””
In other words, in this scenario, rather than competing for spheres of influence, great powers work together inside existing institutions like the United Nations. This may sound very naive. But, as a European, living in small country, right besides three local hegemons that all at some point considered my home country as part of their sphere of influence, I can confirm. Hegemons working together with lots of trade is actually possible… But, then again, the US did play a big role in the creation of the EU, as did the memory of how ruinous great power competition can be.
Therefore, I personally think the middle scenario, a second cold war scenario, is the most likely. In this scenario, we may see the re-emergence of two economic blocks, one centered around China and one around the US. Both these great powers then have their own economic institutions and coalitions of like minded countries. If this happens, we’ll surely still have painful effects from deglobalization, given that the US and Soviet Union were never too interconnected, while China and the US certainly were. In this scenario, we’ll absolutely still see a lot of conflict and uncertainty between these blocks, but it will be far less than in Russia’s spheres of influence scenario.
So, how likely are these scenario’s exactly? Nobody knows for sure. But, if I had to bet money on it, I would put 40% of it on Russia’s spheres of influence vision, 5% on Brazil’s inclusive multi-polarity scenario, and 55% on the cold-war II scenario.
Of course, in reality the multi-polar world order will end up somewhere in between. And, practically, for most of you watching, these 3 scenario’s can be seen as a scale about how bad our two predictions about the multipolar world will get. Brazil’s optimistic scenario may have more global trade and less economic conflict than we see today. But, Russia’s spheres of influence world will almost certainly have less trade, less financial freedom, and more economic threats like tariffs and sanctions. This would be terrible for economic growth, inflation, and asset prices. But, it may actually be good for some countries, like indeed Russia, that are already incredibly isolated in the global order dominated by the US.
But, whichever scenario it will be, I encourage you to stay up to date about the latest development by subscribing to our advertising sponsor: the Economist, which now offers a 20% discount exclusively for Money & Macro viewers.
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