The Biggest Threats to Global Economic Stability

The International Economic Association (IEA) recently concluded its 20th World Congress in Medellín, Colombia. This triennial event brings together scholars from all over the world to share and discuss the latest developments in economic thinking. This year’s edition underscored the urgency of re-evaluating some of the field’s core assumptions. While not a direct focus of the conference, the rapidly escalating debt crisis in the global south cast a shadow over it.

The IEA was founded in 1950, with Joseph Schumpeter chosen to be its first president. Since then, the organisation has been led by some of the world’s most renowned economists, including Paul Samuelson, Janos Kornai, Kenneth J. Arrow, Amartya Sen, and Joseph E. Stiglitz. With the world economy increasingly strained by supply-chain disruptions related to the war in Ukraine, the lingering consequences of the COVID-19 pandemic, and the cloud of uncertainty hanging over the fighting between Israel and Hamas, this year’s Congress has thrown these daunting challenges into sharp relief.

As the global economy undergoes a fundamental transformation, some of the deeply held assumptions economists have relied on to model it must evolve, too. Unsurprisingly, many of the presentations during this year’s Congress focused on the impact of digital technologies and social media on labour, wages, and inequality. Others focused on the changing nature of globalisation, the shift from a unipolar to a multipolar economic order, and the erosion of democratic institutions amid the rise of populist nationalism.

Danny Quah’s lecture underscored the speed with which the global economy is changing. Building on earlier studies by Jean-Marie Grether and Nicole A. Mathys, as well as his own previous research, Quah illustrated the world economy’s shifting centre of gravity, which he defines as the “average location of economic activity across geographies.” In 1980, he showed, this centre was located in the middle of the Atlantic Ocean, reflecting North America’s and Western Europe’s dominance during this period.

As East Asian economies took off, the global centre of economic gravity began to shift eastward. Quah estimates that by 2008, it had moved close to Zmir, Turkey, and kept moving east, driven by the Indian and Chinese economies’ rapid growth. He projects that by 2050, the world’s economic centre will settle between India and China, unlocking opportunities but also stoking geopolitical tensions and giving rise to new threats.

Rising authoritarianism, in particular, remains a major driver of global economic uncertainty. The growing appeal of populist movements, Sergei Guriev argued (based on some of his earlier writings with Elias Papaioannou), could pose an “existential threat” to democratic governance, civil liberties, and the liberal world order.

To be sure, the populist surge is partly an understandable response to rising within-country inequality and reduced social mobility, as Adam Szeidl pointed out in his Congress presentation. Disillusioned Western voters’ tendency to favour right-wing leaders is puzzling, given that these politicians’ favoured policies will likely exacerbate the problems they purport to address.

A financial crisis could provide far-right authoritarians with the momentum they need to dominate Western politics.

Despite the grim predictions of a prolonged economic downturn, the global economy successfully dodged a recession in 2023, buoyed by unexpectedly robust GDP and job growth in the United States. While this has led some economists to adopt a cautiously optimistic outlook for 2024, such complacency is misguided.

The new optimism can be attributed to analysts’ tendency to focus on rich countries when assessing the state of the global economy. A more granular analysis yields a bleaker picture of the world’s economic landscape. Unlike the Great Recession of 2008-09, triggered by the collapse of the US housing market, the biggest threat to global economic stability today comes from the developing world.

During the COVID-19 pandemic, virtually every country was forced to increase public spending. But while developed and middle-income countries had the resources to purchase vaccines, drugs, and equipment, low- and lower-middle-income economies borrowed massively to cope with the pandemic and subsequent food and energy crises. That left dozens of countries in debt distress or at high risk of it, underscoring the need to look specifically at the developing world.

According to the World Bank’s latest International Debt Report, the world’s poorest countries have been hardest hit by the sovereign debt crisis. Their external debt service, which reached an all-time high of 88.9 billion dollars in 2022, is projected to surge by 40pc in 2023-24. Ghana and Zambia have already defaulted, Ethiopia will likely default by 2024, and domestic debt levels in countries like Argentina and Pakistan are alarmingly high.

Not enough is being written about this, but urgent international intervention is necessary to prevent the situation from escalating. While the current crisis may not have the immediate global impact of the 2008 collapse of the US subprime mortgage market, its potential long-term effects could be far-reaching. Notably, it could exacerbate the migration crisis, further fueling the surge of right-wing populism across the developed world.

While the IEA’s five-day Congress in Medellín felt like a breath of fresh air, tackling the developing world’s debt crisis requires more than cutting-edge research. The international community, especially multilateral institutions like the World Bank, must act decisively before the situation spirals out of control.

The AI Age Requires Inequality Insurance

European Union (EU) lawmakers recently reached a provisional agreement on a landmark regulation to mitigate the risks that artificial intelligence (AI) poses to humanity. Other countries seem ready to follow the EU’s lead.

But this regulation does not address one of the greatest disasters AI may bring – the prospect of mass unemployment and sharply increased income inequality. Regulation cannot eliminate these risks without precluding the world from enjoying AI’s potential benefits: dramatic increases in productivity and enormous wealth creation. That is why policymakers must also enact policies to compensate citizens if these disasters occur.

Let us be clear. We are not opposed to regulating AI. But just as we take a two-pronged approach to protect flood-vulnerable homes – building sea walls and providing flood insurance – so, too, must governments offer inequality insurance to ensure that AI does not widen the wealth gap. While future administrations could conceivably change the terms of such a program, cutting back on widely experienced benefits would be politically difficult.

The writing is already on the wall. This year, Hollywood actors joined screenwriters in the first industry-wide strike in more than six decades, with safeguards against generative AI being one of their main demands. But AI will revolutionise the future of work for all types of professionals, from doctors and lawyers to taxi drivers and checkout clerks. The subsequent increases in total output will not be shared equally. Those who make and own the inventions could amass immense wealth, much of which will come from economising on labour costs.

It is tempting to believe that AI will turn huge swaths of the workforce into hamburger flippers, but even that job is being automated. Perhaps there will be other low-value services for people to provide. If not, the ranks of the chronically unemployed will swell. Either way, income disparities will almost surely deepen.

Policymakers can limit, or even prevent, the resulting increases in inequality by reforming the tax system.

For example, if inequality exceeds certain limits, federal income-tax rates on high earners could increase automatically. To stop inequality from rising further, taxes on the top one percent could be set each year to ensure that their share of total national after-tax income never rises above current levels.

To be sure, if AI causes truly catastrophic increases in inequality – say, if the top one percent were to receive all pretax income – there might be limits to what tax reforms could accomplish.

Consider a country where the top one percent earns 20pc of pretax income – roughly the current world average. If, owing to AI, this group eventually received all pretax income, it would need to be taxed at a rate of 80pc, with the revenue redistributed as tax credits to the 99pc, to achieve today’s pretax income distribution; funding the government and achieving today’s post-tax income distribution would require an even higher rate.

Given that such high rates could discourage work, we would likely have to settle for partial inequality insurance, analogous to having a deductible on a conventional insurance policy to reduce moral hazard.

Such a lopsided income distribution is unlikely, and in less extreme cases, full or nearly full inequality insurance would be possible and warranted. But while this thought experiment highlights a weakness of our plan – it cannot provide full insurance in the most catastrophic cases – it also points to the importance of building some form of automatic insurance into the tax system. After all, most people would agree that if economic inequality does spike, the one percent should be taxed at a substantially higher rate than they are today.

To deal with the massive unemployment that AI may bring, many – from Juliet Rhys-Williams in 1943 to US presidential candidate Andrew Yang in 2018 – have proposed a guaranteed minimum basic income for everyone, regardless of what they do. Other economists, such as the Nobel laureate Edmund Phelps, have instead suggested subsidising wages by expanding the negative income tax for low-income families or adjusting corporate tax deductions.

Either way, these plans require funding, and building inequality insurance into the tax system could be a long-term adjustment.

Even though our proposal does not cap the amount of money people can earn or save, we are under no illusions that establishing inequality insurance will be politically easy. But too much is at stake not to try. As US Supreme Court Justice Louis Brandeis put it, we can have democracy or great wealth concentrated in the hands of the few, but not both.

Two aspects of our proposal make it more politically feasible than a traditional tax.

The cap on inequality can be set above current levels – meaning that it would not be triggered immediately. Psychologists have shown that people are more idealistic when deciding about the distant future rather than the present. Because voters do not know their future income bracket, they will likely decide in favour of inequality insurance based on abstract moral principles.

If the insurance is triggered, the beneficiary class would be much greater in number than the top earners paying the higher marginal rate. The transfer of wealth from the one percent should go to the bottom half of earners, although it could conceivably be shared with higher earners to garner their support. Once the insurance kicks in, the legislation could eventually lower taxes for most workers.

Explicitly defining tax rates to provide insurance against extreme inequality was a good idea when one of us first proposed it two decades ago. But it is a much better idea today. To reap AI’s benefits, we must prepare for a potentially catastrophic increase in wealth and income disparities.

 

Defying the Norm: Embracing Time-Honored Traditions

My journey into parenthood unfolded against the backdrop of a culture that values the act of visiting others in moments of joy and sorrow. It was during my postpartum days that I truly experienced the depth of hospitality after my wedding which was shortly after my father’s funeral.

The echoes of ululations and heartfelt congratulations reverberated through our home as family, relatives, friends, and neighbours streamed in to celebrate this momentous occasion. The air was thick with the aroma of freshly prepared meals and the laughter of those who had come to share in our joy. The house, once a sanctuary for two, now buzzed with the energy of a community united in celebration.

My husband, a social butterfly by nature, revelled in the joy of gatherings and hosting others. His enthusiasm for communal celebrations was infectious to me, a more private individual. I soon found myself swept up in the warmth of shared moments.

Generosity flowed like a river. Our home was filled with gifts, each one a testament to the love and support that surrounded us. From precious metals to practical baby essentials, our family and friends lightened our load in a way that was both overwhelming and heartwarming. It was as if the collective embrace formed a protective cocoon around our growing family.

Amidst the chaos of visitors and the flurry of emotions that come with a newborn, there was a serene undercurrent of support. My mother-in-law crossed the Atlantic to impart her wisdom while I felt comforted to have my best friend from Europe with me.

Ethiopia is rich with the spirit of community and traditions. However, the road to blissful parenthood was not without its challenges. While some guests brought an abundance of joy, others inadvertently tested the delicate balance we sought. Some expected to be entertained for hours, their enthusiasm sometimes bordering on overwhelming. Arguments about current affairs, topics best left outside the haven of our home, erupted amid our most intimate moments, waking our precious little one from her naps.

The struggle to find a socially acceptable line of communication became a recurring theme, as I grappled with the need for rest and the desire to be a gracious host. As I nursed my daughter, I encountered the complexities of privacy and the expectations of hospitality. A simple request for a moment of solitude was met with varied reactions. Some understood the need for privacy, while others dismissed it, asserting that my daughter should become accustomed to louder sounds.

The tears shed in moments of frustration were balanced by the overwhelming joy that came with each visit. It became a delicate line of setting boundaries and expressing needs, a lesson in navigating the intricacies of cultural expectations and personal well-being.

One particular weekend, our home played host to over 60 people. The once cosy haven transformed into a bustling space which came with a stark contrast to my baby’s comfort.

Medical professionals emphasised the vulnerability of newborns, urging caution in the face of infectious risks. The joy of shared moments needed to be balanced with a commitment to safeguarding our daughter’s fragile immune system. As we gently communicated our need for limited contact and hygiene practices, we found some guests responding with understanding and care while others challenged our decision.

We embraced the responsibility of setting boundaries to protect the sanctity of our new family amidst the warmth of our community. The joy of newborn snuggles was not diminished; rather, it was enhanced by a commitment to the health and well-being of our baby.

I am filled with gratitude for the rich tapestry of Ethiopian traditions that guided us. Yet, I believe visits need to be kept short, allowing moments of solitude to bond with newborns as new parents need time to rest and adjust.

Financial Intricacies and Sales Tactics

I was having a captivating chat with one of my oldest friends when an unexpected interruption in the form of a man dressed in a grey suit abruptly halted our conversation. Engrossed in our discussion, both of us were visibly irritated to be disturbed by an individual inquiring about our plans to purchase a house. He was a real estate agent.

He delved into details about the size of rooms, playgrounds, and kitchens until he dropped the bombshell –the initial payment that exceeded our imaginary budget. My friend’s laughter echoed in response, not because it was exorbitant, but because it surpassed her financial limits. She casually mentioned her struggle to put food on the plate, let alone buy a house. It was a strategic move to deter him from further attempts.

My friend, despite a decent salary and a successful career, confessed to playing the poverty card to often ward off relentless sales representatives. This speaks to the frustration many feel when bombarded by unsolicited sales attempts and raises questions about the comfort of such practices. It highlights the need for a more respectful and personalised approach in sales, one that recognises the individuality of financial situations.

The conversation veered to bank employees urging customers to open yet another account. I recounted the number of accounts I have opened with a minimal deposit while it remain largely dormant. It was a humorous twist on the perceived success of increasing account openings, as true success, in my opinion, lies in properly managing the active ones.

Curiosity led me to explore why commercial banks persist in convincing customers to open additional accounts, even when immediate benefits are not evident. During a conversation with a banker, I discovered the advantages of building a stronger connection with the customer, increasing the potential for cross-selling other products and services. This, in turn, translates into higher revenue and a loyal customer base which not only strengthens the bank’s position but also enhances its negotiating power with businesses and lenders.

The data generated from each transaction associated with a new account contributes to a wealth of information, enabling personalised marketing campaigns, tailored product recommendations, and improved risk assessment.

The exploration into the bank’s perspective provides valuable insights into the strategic thinking behind urging customers to open additional accounts. However, it also underscores the importance of respecting the customer’s autonomy and providing incentives and convenience to encourage active usage.

Many customers may not see the need and the hassle of transferring funds and setting up new arrangements. Even if a customer does open a new account, there is no guarantee of active use. The persistent intrusion of sales pitches prompts individuals to employ various tactics, even misrepresenting their financial situation.

Sales pitches and personal finance require a delicate balance. The encounters with real estate agents and bank employees prompt reflection on the need for more respectful and personalised sales practices and the importance of active engagement and satisfaction in relationships.

We must be given the room to make choices that align with our financial goals and values. Similarly, institutions must strike a balance between business objectives and customer well-being, recognising that true success lies not in numbers but in the quality of relationships built with their customers.

Misgivings Put AfDB’s $1.24b Ethiopia Projects at Stake

The African Development Bank (AfDB) has signalled potential disruptions in its Ethiopian operations, worth an estimated 1.24 billion dollars, blaming safety concerns for its international staff. This followed an incident where Ethiopian security forces detained two international staff of the Bank, whose investigation the AfDB claims was not satisfactorily resolved by Ethiopian authorities.
The detained staff was released after the interval of Ethiopia’s high-ranking officials, including President Sahleworq Zewdie and Prime Minister Abiy Ahmed (PhD), in November. After the incident a high-level inquiries force chaired by Teklewold Atnafu, monetary policy advisor to the Prime Minister, has been established to probe the case, sources disclosed.
AfDB President, Akinwumi Adesina (PhD), expressed dismay at the lack of communication from the authorities in Addis Abeba.
“We remain particularly concerned that the Ethiopian government has not shared any report, or details of investigations with the Bank,” Adesina said in a letter he issued.
The Bank’s decision to withdraw its international staff, albeit temporarily, brought to light the rising security concerns expats feel. Adesina disclosed that the international staff would resume in-country operations once the government provides transparent details of its investigations and the measures taken in response to the incident. While the Bank’s Ethiopian office will continue to operate, it will do so under an Officer-in-Charge, with the locally recruited staff remaining employed.

BGI Plans Expansion, Merge Subsidiaries in Bid to Reclaim Market Leadership from Rival Heineken

BGI Ethiopia, one of the country’s top brewers, has announced an aggressive five-year expansion plan, aiming to consolidate its four subsidiaries – Meta Abo, Zebidar, Raya, and Castel – into a single corporate entity under BGI. The strategy, spearheaded by the new CEO, Herve Milhade, is designed to challenge Heineken’s current market dominance.
The ambitious overhaul signals BGI executives’ resolve to reclaim the top position in the brewing industry. The CEO disclosed that the expansion includes doubling BGI’s annual production capacity to 10 million hectolitres by the end of 2028. The first phase will see Meta Abo liquidated within a year and relocating BGI’s plant in Addis Abeba to Sebeta town in Sheger City and Maichew town in the Tigray Regional State, with both relocations completed in approximately 18 months.
During a media briefing at the Sheraton Addis last week, Milhade outlined his vision for BGI, emphasising the importance of his restructuring plan in the company’s growth trajectory. However, these changes have stirred concerns among BGI’s 5,500-strong workforce, comprising both full-time and contract employees. The CEO assured that the company would focus on expanding its sales network and recruiting new talent post-relocation, offering significantly higher compensation packages to those unable to continue with BGI.

WISHY-WASHY

A row of custodians clean up the Addis Abeba Light Railway System fences around the Megenagna area. While hailed during its inauguration around a decade back as transformative to the capital’s transport landscape, the 34Km of iron and pavement has not lived up to the hype. Mayor Adanech Abiebe recently indicated a pending revamp of the railway system where more than half of the 41 trains have been out of service due to spare part problems. Meanwhile, the unprecedented crowd of passengers moving in the working ones have left many to look for other options.

CURTAIN CALL

Top view of the construction of the National Theater expansion project from the 47th floor of the tallest building in the city. Five years into its construction commencement, the 1.5 billion Br project, seated on 7,000sqm, was under embattled Afro Tsion Construction which was kicked off the project for alleged failure to complete in the scheduled period despite receiving around 224 million Br in payments. The National Theatre is one of the flagship projects that is set to transform the capital’s aesthetics which was later given to Ovid Construction last year.

LIQUID SWORDS

(Left) Lelise Neme, head of the Ethiopian Investment Commission, Gebremesqel Challa, minister of Trade & Integration, Aklilu Tadesse, CEO of the Industrial Park Development Corporation. Several stakeholders gathered at the Hyatt Regency Hotel last week to discuss the creation of an enabling environment in the manufacturing sector. Exports from industrial parks fell by 24pc last year while Ethiopia’s merchandise exports also tumbled in double digits. Lack of access to finance, foreign currency shortages and political instability contribute to the panoply of issues the manufacturing sector faces.

Enat Bank Powers with Half a Billion Profits

Enat Bank delivers a little over half a billion Birr net profit to shareholders gathered at the Millenium Hall with interest income powering nearly 70pc of its revenues.
The Bank’s total revenue grew by 52.4pc to 3.3 billion Br in the year which saw its total assets increase by around 29pc to 22.7 billion Br. Total deposits rose by 36.8pc to 17.8 billion Br while its loans and advances grew by a third to 14.9 billion Br. While Enat’s paid-up capital remains at half of the regulatory minimum, it has shown a 31.2pc growth from last year.
Board Chairwoman Frehiwot Worku revealed to shareholders who number above 22,000 that the year’s profits came about despite increased competition, decreased liquidity and dwindling foreign currency earnings. The high branch expansion of the Bank fueled the rise in expenses of 44pc as it reached 2.6 billion Br and increased its staff number by 577 to 1,555 in total.
The Bank President Ermias Andarge pointed to the high cost of living, drought, and civil unrest in different parts of the county as enduring challenges in the domestic economy.