Why Nations Fail? | Economics Explained

Summary

Despite global economic challenges, there is optimism as total global output has significantly increased since the pandemic began, with the world expected to exceed a GDP of $100 trillion. However, this prosperity is not evenly distributed, leading to economic breakdowns in developing countries like Lebanon, Sri Lanka, and Pakistan. Advanced economies have built-in advantages, such as reliable foreign income and the ability to attract skilled workers, which mitigates economic collapse. The role of government in providing infrastructure for industry is crucial, and democracies, with their accountability mechanisms, are better equipped to manage economic development and avoid collapse.

Takeaways

• 🌍 Global output has significantly increased, with the world expected to exceed a GDP of $100 trillion for the first time.
• 📈 Despite global prosperity, inequality has grown, with the average person being more economically prosperous than a generation ago but not all sharing in this prosperity.
• 💔 Developing economies are more prone to economic breakdowns due to their reliance on market output and vulnerability to external economic shocks.
• 🏦 Advanced economies have advantages such as valuable industries, attractive living standards, and the ability to fill skill shortages quickly, reducing the risk of collapse.
• 💰 Developing countries often face higher interest rates and economic pressures when global economic conditions tighten, affecting their ability to repay debts.
• 🛣️ Infrastructure development is crucial for economic growth, and advanced economies have an advantage as their infrastructure is mostly already built and maintained.
• 🌐 China's Belt and Road Initiative has been a significant source of foreign investment for developing countries, but it has also led to debt challenges and prioritization of Chinese trade interests.
• 🏛️ Democracies with representative governments tend to make more careful economic decisions due to accountability to voters, leading to better economic performance.
• 💥 Economic shocks, both supply and demand, can be the 'spark' that leads to an economic collapse, especially when existing vulnerabilities are present.
• 🌟 While the world as a whole is expected to continue growing economically, this growth will not be evenly distributed, leading to potential future economic crises.

Q & A

How has the global economic output changed since the start of the pandemic in late 2019?

The global output has significantly increased since the start of the pandemic, with the world expected to exceed a GDP of a hundred trillion dollars for the first time ever. This indicates that the world is producing three times as much as it did 23 years ago, at the turn of the millennium.

What does the increase in global economic output imply for the average person's prosperity?

The increase in global economic output implies that the average person is twice as economically prosperous as they were a generation ago. However, it's important to note that this prosperity has not been shared equally, and as the world gets richer, it also becomes more unequal.

Why are developing economies more prone to economic breakdowns compared to advanced economies?

Developing economies are more prone to economic breakdowns because they lack the advantages that advanced economies have, such as valuable industries providing a consistent source of foreign income, the ability to attract skilled workers, and the capacity to borrow money at lower interest rates. Additionally, developed economies have already built much of their necessary infrastructure, making it easier and less risky to maintain and expand it compared to building from scratch.

What is the role of infrastructure in economic growth?

Infrastructure plays a critical role in economic growth by providing the necessary utilities for industries to operate competitively. This includes shipping ports, airports, roads, phone and internet networks, as well as education and healthcare. Good infrastructure spending should enable enough economic growth that the additional tax generated from industrial activity pays back the government's initial investment.

How does the Belt and Road Initiative by China impact developing countries?

The Belt and Road Initiative by China offers cheap loans to mostly undeveloped and developing economies to build infrastructure projects. While this can help open up these countries to trade networks, it also comes with the expectation of loan repayment, even at low interest rates. China's control over what is built often favors infrastructure that enhances trade with China, which may not always be the most economically beneficial investment for the recipient country.

What are the two broad classifications of economic shocks?

Economic shocks can be classified into supply shocks and demand shocks. Supply shocks are unexpected changes that affect the market supply, such as a natural disaster destroying factories. Demand shocks are unexpected changes in market demand, such as a population reducing spending due to fear or uncertainty.

What is the role of democracy in fostering strong economic performance?

Democracy, through its system of representational government, allows people to vote on policy decisions. This means that government leaders are motivated to supply services that not only maintain order but also provide the tools needed for economic growth and opportunity creation. The democratic process ensures that government actions are double-checked by the populace, leading to more careful implementation of projects and policies.

Why do economic collapses sometimes occur despite poor economic management and bad investments?

Economic collapses occur due to a combination of poor economic management, bad investments, and corruption, but they require an additional 'spark' to tip the economy into collapse. This 'spark' is usually an economic shock, such as the global pandemic, which exacerbates existing vulnerabilities and pressures within an economy.

What are the potential long-term effects of the global economic changes over the past few years?

The global economic changes over the past few years are likely to result in a net positive outcome for the world as a whole, with continued economic prosperity. However, this growth may not be evenly distributed, leading to further inequality. Additionally, there may be more national economic crises in the coming years as countries adjust to these changes.

How do economic shocks like the global pandemic affect economies?

Economic shocks like the global pandemic act as a 'lightning strike' that can rapidly change market forces. They can cause sudden and unexpected changes in supply and demand, leading to economic stress and potential collapse, especially in economies with existing vulnerabilities.

What is the role of international organizations like the IMF and the World Bank in preventing economic failures?

International organizations like the IMF and the World Bank work to prevent economic failures by providing assistance and negotiating debt for countries in crisis. They aim to stabilize economies and prevent the spread of economic crises to other nations.