Editorial | Dec 26,2020
Dec 30 , 2023
By Kaushik Basu
We are at a critical moment in history where decisive actions are needed to navigate the complex economic landscape. The world’s focus must shift towards collaborative solutions, particularly for the vulnerable economies on the brink of crisis, writes Kaushik Basu, a professor of economics at Cornell University and a non-resident senior fellow at the Brookings Institution, in this commentary provided by Project Syndicate (PS).
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.
PUBLISHED ON
Dec 30,2023 [ VOL
24 , NO
1235]
Editorial | Dec 26,2020
Viewpoints | Sep 18,2021
My Opinion | Aug 26,2023
Exclusive Interviews | Apr 15,2023
Commentaries | Jan 16,2021
My Opinion | Mar 01,2024
Fortune News | Feb 17,2024
Commentaries | Jan 09,2021
Exclusive Interviews | Jan 05,2020
Editorial | Sep 14,2019
Photo Gallery | 98303 Views | May 06,2019
Photo Gallery | 90534 Views | Apr 26,2019
My Opinion | 70875 Views | Aug 14,2021
My Opinion | 67159 Views | Aug 21,2021
Commentaries | May 11,2024
Editorial | May 11,2024
Feb 24 , 2024 . By MUNIR SHEMSU
Abel Yeshitila, a real estate developer with a 12-year track record, finds himself unable to sell homes in his latest venture. Despite slash...
Feb 10 , 2024 . By MUNIR SHEMSU
In his last week's address to Parliament, Prime Minister Abiy Ahmed (PhD) painted a picture of an economy...
Jan 7 , 2024
In the realm of international finance and diplomacy, few cities hold the distinction that Addis Abeba doe...
Sep 30 , 2023 . By AKSAH ITALO
On a chilly morning outside Ke'Geberew Market, Yeshi Chane, a 35-year-old mother cradling her seven-month-old baby, stands amidst the throng...
May 11 , 2024
The ruling Prosperity Party - the Prosperitians - has its leaders turned to the Publi...
May 2 , 2024
For successive generations of Ethiopia's tax authorities, the chore of tax collection...
Apr 27 , 2024
The Prosperity Party (PP) - Prosperitians - is charting a course through treacherous...
Apr 20 , 2024
In a departure from its traditionally opaque practices, the National Bank of Ethiopia...
May 11 , 2024 . By BERSABEH GEBRE
Additional corridor-development plans embrace more weredas Officials of the Ad...
May 11 , 2024 . By BERSABEH GEBRE
Ethiopia's parliament established an 18-member think tank focused on addressing the construction industry woes. Under the leadership of...
May 11 , 2024 . By AKSAH ITALO
Manufacturers of biscuits, noodles, and animal feed are sounding the alarm, urging policymakers to interv...
May 11 , 2024 . By AKSAH ITALO
Ethiopia is contested to fully embrace the African Continental Free Trade Area (AfCFTA) due to slow progr...