| Summary: | This paper discusses the need to recognise the evolving purpose of policy space for developing and developed countries in a changing global economic system. This paper examines the changes in rules and regulations in the global economic system, as well as the rise of Global Value Chains (GVCs), which create a different landscape of opportunities and challenges for developing countries than what the currently developed countries experienced. Rather than continuing the debate on whether or not countries have enough policy space, this paper asks ‘who are the shapers of policy space?’. Interstate power imbalances shape policy space in a way that is ignored by the mainstream literature, and to picture this imbalance, the paper applies Albert Hirschman’s ‘Exit, Voice and Loyalty’ (1970) framework, as well as Mushtaq Khan’s political settlement theory (2010), to conceptualise how suitable policy space for development prospects could be negotiated. This paper focuses on the literature within development economics and concludes that the way in which policy space is determined as the outcome of power distributions offers insufficient flexibility for not only developing countries to move up to higher value-added opportunities but also for developed countries to adapt to changing circumstances in the global economy. To thrive in an increasingly complex world, where the drivers of economic development and prosperity may need to centre around alternative models, increased flexibility is needed. How much flexibility and who should decide the extent of flexible policy space? This paper agrees with suggestions for global collective action and collaboration as the foundation for determining suitable policy space. Ultimately, policy space can serve as a mediation mechanism for countries to adapt to change during development and this paper emphasises the risks of rigid policy space, which can simply perpetuate mainstream logic.
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