Policy Space in an Era of Changing Geopolitics and Technology Paradigms

Traditional interpretations of policy space emphasize trade and investment constraints. This paper provides a narrative featuring a unified framework that allows examining both endogenous and exogenous forces that make these interpretations inadequate, and potential alternatives. Endogenously, the Liberal International Order (LIO) experiences overreach and a shifting composition while, exogenously, geopolitical tensions and transformations from digitalization and the energy transition challenge policy paradigms. These factors combined alter how states exercise their sovereignty and how policy space is defined. The policy space debate must extend to broader questions, including core assumptions about a rules-based order, interdependence, industrial policy, and public support. Key issues are: 1) A multipolar world demanding a more flexible, layered form of a rules-based order. 2) Industrial policy re-gaining acceptance and giving developed countries greater leeway, whereas developing nations continue to face more stringent constraints. 3) Geopolitics, the energy transition and digitalization requiring a new balance between rule-based disciplines and flexibilities, where especially digitalized money can strongly impact developing countries’ policy space in either direction. 4) Regaining public support for a rules-based order requires containing corporate power and implementing more progressive taxation. A central question moving forward is how the Global South can help shape global norms and governance.