The 20th World Congress of the International Economic Association (IEA) was recently held in Medelln, Colombia.
This biannual event brings together academics from all over the globe to explore and discuss the most recent advancements in financial thought. This week’s book emphasized the necessity of reassessing some of the fundamental presumptions in the field. Even though it wasn’t the conference’s main focus, the rapidly worsening debt crisis in the Global South did cast a shadow over it.
Joseph Schumpeter was chosen to serve as the IEA’s first leader when it was founded in 1950. Since then, some of the most eminent academics in the world, including Joseph E. Stiglitz, Paul Samuelson, János Kornai, Kenneth J. Arrow, and Amartya Sen, have served as the organization’s leaders. This week’s Congress has brought these difficult challenges into sharp relief as the world market has become more constrained as a result of supply chain disruptions brought on by the conflict in Ukraine, the COVID-19 crisis, and the lingering uncertainty surrounding Israel and Hamas ‘ conflict.
Some of the seriously held presumptions economists have relied on to design the global economy may also change as it undergoes a basic transformation. Unsurprisingly, the effect of social media and digital technologies on work, wages, and inequality was a major topic of discussion at this year’s Congress. Others concentrated on the shifting nature of globalization, the transition to a multilateral financial system, and the demise of democratic institutions as populist nationalism gained traction.
The pace of worldwide economic change was emphasized in Danny Quah’s presentation. Quah demonstrated the shifting center of gravity of the global economy, which he defines as the “average area of economic activity across locations,” building on earlier research by Jean-Marie Grether and Nicole A. Mathys as well as his own prior study. He demonstrated that this facility was situated in the middle of the Atlantic Ocean in 1980, demonstrating how dominant North America and Western Europe were at the time.
The international center of economic weight started to move eastward as South Asian economy took off. According to Quah, due to the rapid growth of the Chinese and Indian markets, it had moved nearer to Zmir, Turkey, and continued to move south by 2008. He predicts that by 2050, the financial hub of the world may be established between China and India, opening up opportunities while also escalating political conflicts and posing fresh dangers.
Particularly rising dictatorship continues to be a significant cause of the world’s monetary unrest. According to some of Sergei Guriev’s earlier works with Elias Papaioannou, the growing popularity of nationalist movements could be a “existential danger” to democratic governance, legal rights, and the liberal world order.
As Adam Szeidl noted in his Congress presentation, the populist surge is undoubtedly a partially natural response to rising intra-country inequality and decreased social mobility. However, given that these officials ‘ favored guidelines will likely exacerbate the issues they purport to tackle, it is strange that disappointed Western voters have a tendency to prefer right-wing leaders.
Far-right authoritarians may have the speed they need to rule European politics thanks to a financial crisis.
The global market successfully avoided a recession in 2023, buoyed by surprisingly strong GDP and employment growth in the United States, despite the gloomy predictions of an extended economic downturn. Although this has prompted some economists to take a slowly upbeat view for 2024, I think this complacency is misguided.
Researchers ‘ propensity to concentrate on wealthy nations when assessing the state of the global market is to blame for the newfound enthusiasm. A more thorough evaluation paints a more bleak picture of the financial climate in the world. The developing world poses the greatest threat to world economic security today, in contrast to the Great Recession of 2008–2009, which was sparked by the US housing market’s collapse.
Almost every nation in the world was compelled to raise public spending during the COVID-19 crisis. However, lower- and lower-middle-income economies borrowed heavily to deal with the pandemic and the ensuing food and energy crises, whereas developed and middle income countries had the resources to buy vaccines and drugs, as well as equipment. This highlighted the need to focus exclusively on the developing world and left dozens of nations in debt problems or at higher risk of it.
The country’s poorest nations have been hardest hit by the sovereign-debt issue, according to the most recent International Debt Report from the World Bank. Their external debt service, which peaked at$ 88.9 billion in 2022, is expected to increase by 40% between 2023 and 2024. Home loan rates in nations like Argentina and Pakistan are dangerously high, Ghana and Zambia have already declared definition, and Ethiopia is likely to do so by 2024.
There hasn’t been enough written about this, but urgent international action is required to stop the situation from getting worse. Although the present crisis might not have the same urgent global effects as the US subprime mortgage market’s collapse in 2008, its potential long-term effects could be significant. Importantly, it might make the migration crisis worse, escalating the rise of right-wing populism throughout the developed world.
While the IEA’s five-day Congress in Medelln felt like a breath of fresh air, cutting-edge analysis is not enough to address the debt crisis in the developing world. Before the situation spirals out of control, the international community, particularly international organizations like the World Bank, may take decisive action.
Professor of Economics at Cornell University and non-resident senior fellow at the Brookings Institution, Kaushik Basu is a former deputy scholar of the World Bank and key financial advisor to the Government of India.
Project Syndicate was the original publisher of this article.