Why Nations Fail? | Economics Explained

Economics Explained
23 Apr 202315:21

Summary

TLDRDespite 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.
  • πŸ“ˆ 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.
  • πŸ’” 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.
  • πŸ’° Developing countries often face higher interest rates and economic pressures when global economic conditions tighten, affecting their ability to repay debts.
  • πŸ›£οΈ 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.
  • πŸ›οΈ Democracies with representative governments tend to make more careful economic decisions due to accountability to voters, leading to better economic performance.
  • πŸ’₯ 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.

Outlines

00:00

🌍 Global Economic Progress and Inequality

This paragraph discusses the global economic conditions over the past three years, highlighting the focus on national economic crises rather than on positive economic developments. Despite pessimism, there is room for optimism as global output has significantly increased since the pandemic began, with the world expected to exceed a GDP of a hundred trillion dollars for the first time. This growth reflects a doubling of economic prosperity for the average person over the past 23 years. However, this prosperity is not evenly distributed, leading to increased inequality as the world gets richer.

05:01

🌱 Economic Breakdowns in Developing Economies

The paragraph examines the trend of economic breakdowns in individual economies, particularly in developing countries. It contrasts these with the more stable conditions in advanced economies, which have several advantages such as valuable industries, skilled workforces, and lower borrowing rates. The breakdowns in developing economies are often due to their reliance on market production and their vulnerability to external economic shocks. The paragraph also discusses the challenges faced by undeveloped economies, which have largely informal economic outputs and limited market integration.

10:02

πŸ—οΈ Infrastructure and Government's Role in Economic Growth

This section emphasizes the critical role of government in economic growth, particularly in providing infrastructure necessary for industry operation. It explains how good infrastructure spending can stimulate economic growth that, in turn, generates tax revenue to repay government loans. The paragraph also addresses the challenges developing countries face in funding and implementing nation-building projects, and how advanced economies benefit from already established infrastructure and lower interest rates on borrowing.

15:05

πŸ—³οΈ The Power of Democracy in Preventing Economic Failure

The paragraph discusses the impact of democratic systems on economic performance, as demonstrated by the work of Nobel laureates Douglas North and Robert Fogle. It explains how democracies, through representative government and accountability to voters, are motivated to provide services that foster industry and create opportunities. The paragraph also touches on the Belt and Road Initiative led by China, highlighting the risks associated with large-scale infrastructure projects in countries with weaker democratic institutions and the potential for misuse of resources.

🚨 Economic Shocks: The Spark for Collapse

This paragraph delves into the concept of economic shocks as the catalysts for economic collapse. It differentiates between supply shocks and demand shocks, providing examples of how unexpected changes in market forces can stress economies. The paragraph also discusses the global pandemic as a significant economic shock, and how it, along with the economic responses to it, has acted as a 'lightning strike' leading to economic crises. It concludes by suggesting that the world may continue to face more national economic crises in the coming years as it adjusts to a new decade.

πŸŽ™οΈ Additional Resources and Conclusion

The final paragraph offers additional resources for further exploration of economic topics, including a link to a video and mentioning the availability of podcasts on Spotify. It ends the script on a note of thanks to the viewers for their engagement with the content.

Mindmap

Keywords

πŸ’‘Global economic conditions

Refers to the overall state of the world economy, including factors such as GDP growth, trade, and financial stability. In the video, it is mentioned that the past three years have been dominated by discussions of national economic crises rather than positive economic developments, highlighting the impact of global economic conditions on the focus of economic conversations.

πŸ’‘National economic crisis

A situation where a country's economy experiences severe difficulties, often characterized by high unemployment, inflation, or a significant decline in GDP. The video discusses how national economic crises have been a central topic due to recent global economic challenges, with countries like Lebanon, Sri Lanka, and Pakistan facing total economic collapse.

πŸ’‘Economic prosperity

The state of a country or region where there is a high level of wealth, economic growth, and a good standard of living for its inhabitants. The video emphasizes that despite inequality, the average person today is more economically prosperous than a generation ago, indicating a general trend of increasing economic prosperity worldwide.

πŸ’‘Inequality

The unequal distribution of resources, wealth, and opportunities within a society or globally. The video points out that while the world gets richer, it also becomes more unequal, with prosperity not being shared equally among all people.

πŸ’‘Developing economies

Countries that are in the process of industrialization and economic growth, often characterized by a shift from agricultural to industrial activities and an increase in GDP per capita. The video explains that developing economies are more prone to economic breakdowns due to their reliance on market production and lack of economic diversification.

πŸ’‘Advanced economies

High-income countries with a high level of industrialization, technological development, and economic stability. The video outlines the advantages of advanced economies, such as their ability to attract skilled workers, generate foreign income, and borrow money at lower interest rates, which makes economic collapses rare.

πŸ’‘Economic shocks

Sudden events or changes that disrupt the normal functioning of an economy, leading to unexpected shifts in supply and demand. The video describes economic shocks as triggers for economic collapses, with the global pandemic serving as a significant shock that has strained economies worldwide.

Highlights

Global economic conditions have dominated discussions about national economic crises rather than interesting economic ideas.

Despite pessimism, there is optimism as global output has significantly increased since the pandemic began.

The world is expected to exceed a GDP of a hundred trillion dollars for the first time ever.

The global population has increased by 2 billion people, and the average person is twice as economically prosperous as a generation ago.

Inequality has increased alongside global wealth, but the quality of life for the average person has improved.

Developing economies are experiencing isolated breakdowns, with countries like Lebanon, Sri Lanka, and Pakistan facing economic collapse.

Advanced economies have advantages over developing economies, including consistent foreign income and the ability to attract skilled workers.

Undeveloped economies often have informal economic output and populations living independently of the market.

Advanced economies can borrow money at lower interest rates and from their own populations, reducing economic risks.

Economic collapses in developing countries are often triggered by being cut off from sources of US dollars.

The role of government in economic growth is crucial, particularly in providing infrastructure for industry.

Good infrastructure spending should enable economic growth that pays back the government's initial investment.

Advanced economies have the advantage of already built infrastructure, making further development easier and less risky.

The Belt and Road Initiative by China provided loans to developing countries for infrastructure projects, but with conditions favoring China.

Economic shocks, both supply and demand, can trigger economic collapses in vulnerable economies.

The global pandemic and economic response were like a lightning strike, sparking economic crises in multiple countries.

International organizations like the IMF and World Bank work to prevent economic failures from spreading.

The world is likely to see more national economic crises as it recalibrates from the challenges of the past few years.

Despite future economic crises, the overall trend indicates a more prosperous world economy that benefits some more than others.

Transcripts

play00:00

global economic conditions over the past

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three years have meant that we've spent

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a lot more time on this channel talking

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about the latest National economic

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crisis than we have talking about

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interesting economic ideas or how great

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Norway is economists are a pessimistic

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Bunch because on YouTube and in the real

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world most people want to know about

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what is going wrong before anything else

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but there is reason to be optimistic

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total Global output is significantly

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higher now than it was before the

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pandemic started in late 2019 and either

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this year or potentially even last year

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the world is expected to exceed a GDP of

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a hundred trillion dollars for the first

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time ever that means the world is

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producing three times as much stuff as

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it was just 23 years ago at the turn of

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the Millennium in that time we have

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added 2 billion people to this planet

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which is a lot but it's only an increase

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of around 30 percent which means that

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the average person out there in the Big

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Blue world is twice as economically

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prosperous as they were just a

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generation ago a lot of that Prosperity

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has not been shared equally and as the

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world gets richer it also gets more

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unequal but in agria life for the

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average person today is better than it

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ever has been and when economists aren't

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talking about the latest crisis most

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tend to agree that this trend will

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continue now while the world as a single

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economy is looking better than ever

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there is an emerging trend of more and

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more individual economies experiencing

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isolated breakdowns that are still

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threatening the well-being of hundreds

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of millions of people mostly this is

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happening in developing economies and

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already this year which is not even half

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over yet we've had to look at Lebanon

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Sri Lanka and Pakistan as economies that

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have experienced almost total collapse

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there are at least a dozen other

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countries in the world right now that

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are in varying stages of the same

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breakdowns and it's important to

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understand why this is happening now as

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opposed to two or three years ago when

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the global economy was arguably in a

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much worse shape so why are there so

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many economies facing economic collapse

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now are there any common problems with

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these economic failures and finally can

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economists just avoid these problems to

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stop ruining other economies

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this episode of Economics explained was

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brought to you by short form instead of

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spending days reading a single book

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short form offers super comprehensive

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guides to thousands of non-fiction books

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that you can read in just a few hours

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they cover topics like Finance business

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economics and more short forms condensed

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Library still gives you all the most

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important information from famous titles

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like why Nations fail a fantastic book

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that I've used to research this video

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it's also a great way to pick out the

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next book you want to read from

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beginning to end use my link on screen

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plus three months off the annual

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subscription

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the reason why most National Economic

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breakdowns tend to happen in developing

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economies instead of undeveloped or

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advanced economies is because advanced

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economies have a lot of advantages over

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developing economies and undeveloped

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economies are sort of in a state of

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constant economic failure the economic

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output of undeveloped countries like

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Mali or South Sudan is largely informal

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with people living lives which are much

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more independent of the market than most

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other people in the world the

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populations of these countries often

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live on less than two dollars a day

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especially in Regional areas but they

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make do because they are able to grow

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and collect a lot of their own food make

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their own shelter and provide services

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to one another living in small

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communities without the need for money

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as a formal medium of exchange since the

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goods that people produce for themselves

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are not counted towards National

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Economic output figures and even if they

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were they'd be almost impossible to

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record the macroeconomic figures from

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these countries often present worse than

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the reality this still happens in

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advanced economies as well if you clean

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your own home that doesn't count towards

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economic output but if you clean someone

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else's home and then charge them for it

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that does count towards GDP as a service

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in developing an advanced economies a

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larger portion of people's labor is

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dedicated to producing output for the

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market rather than themselves this is a

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good thing overall because it lets

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people specialize in doing one task

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really well and producing more for

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everybody overall but it does mean that

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people are more dependent on the market

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and less able to produce everything they

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need for themselves like what happens in

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undeveloped economies of course that's

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not to say that life in these countries

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is easy or prosperous by any stretch of

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the imagination but it does mean that if

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they're recorded economic output Falls

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by 20 one year the quality of life for

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the average person in that economy would

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not be as heavily impacted as it would

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be in an economy where people dedicate

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most to their labor to producing value

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for the market that in turn supplies

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them with almost everything they need on

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the opposite end of the spectrum

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advanced economies have a lot of

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advantages that make outright collapses

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is very rare advanced economies are

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often home to industries that provide

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valuable goods and services all over the

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world so they have a consistent and

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reliable source of foreign income

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advanced economies also have high

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standards of living which makes them an

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attractive destination to Skilled

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workers all over the world which means

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that they can fill in any skill

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shortages they have almost on demand if

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an advanced economy needs engineers then

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they can just create a few thousand

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working visas for engineers and the

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roles will get filled fairly quickly by

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people attracted to the highest salaries

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and better standards of living in

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advanced economies depending on if those

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visas require the person to keep their

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job it can also make unemployment

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self-correcting because if the labor

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market hits a downturn and needs less

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workers then those now unemployed

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Engineers will be forced to go back to

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their home country to become an

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unemployment problem for a developing

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economy advanced economies can also

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borrow money at lower interest rates and

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they can borrow it from their own

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populations which are on average

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wealthier some advanced economies can

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even borrow money in their own

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currencies which means that they don't

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run into problems with foreign exchange

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rates and sourcing foreign currencies to

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pay back their loans there have been a

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lot of economic collapses that started

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with developing countries being

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temporarily cut off from their source of

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US dollars either because trade slowed

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down or just because U.S based

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institutions pulled their money back

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into their own domestic economy this is

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happening around the world right now

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because interest rates are higher and

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people are more uncertain about the

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economic future of a lot of weakened

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countries why would a big multinational

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corporation take a risk putting their

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money into a developing country which

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could become the next Sri Lanka or they

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could just invest it into government

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treasuries which are paying high yields

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without any of the risk this also puts

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pressure on developing economies because

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their governments have to offer even

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higher rates on their government bonds

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to compensate investors for the risk of

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not putting their money into domestic

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treasuries where repayments are

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basically guaranteed Sri Lanka is

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currently paying 24.4 interest on their

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10-year government bonds and even that

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isn't good enough for most investors

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this is really important because it

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undermines the role of government in

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economic growth

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strong Effective Government is crucial

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to any economy and one of the most

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critical roles that they play is

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providing the infrastructure needed for

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industry to operate this is stuff like

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shipping ports airports roads phone and

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internet networks and even education and

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Healthcare no industry would be able to

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operate competitively without these

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utilities just think a company like

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Amazon uses ports and roadways to

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transport their products all over the

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world they obviously use internet

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infrastructure to run their entire

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operation and they need well-educated

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people to build everything investing

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into infrastructure that will allow

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Industries to exist is crucial to any

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economy eventually a lot of these

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utilities can be privatized and that has

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its own pros and cons but initially it's

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the role of governments to build these

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out good infrastructure spending should

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enable enough economic growth that the

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additional tax generated from industrial

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activity pays itself back in taxes to

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the government this enables the

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government to pay back the loans they

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had to take out to fund the

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infrastructure in the first place

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unfortunately in the real world most

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governments can't just print their own

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money to fund these projects because

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they normally involve big International

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companies that aren't going to accept

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payment and a currency from a developing

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country that doesn't yet even produce

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anything of value they're going to want

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a world Reserve currency like US Dollars

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the Euros or increasingly Chinese RMB if

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it's a Chinese Construction Company

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overseeing the development which is

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important to remember and we'll get into

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that soon either way advanced economies

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have some major advantages over

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developing economies in this regard

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because a lot of their infrastructure is

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already built yes of course constant

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reinvestment expansion and maintenance

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is necessary but that is still all much

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easier cheaper and less risky than

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building these utilities from scratch

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and hoping that it Spurs enough

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industrial activity to pay back the

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loans another Advantage advanced

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economies have is the lower interest

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rate in which they can borrow money a

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10-year U.S federal bond has a yield of

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3.43 at the time of making this video

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investing into projects that will

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stimulate that much economic growth or

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more is difficult but doable for a

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country like Sri Lanka from earlier

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though there is almost no

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nation-building project that would

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contribute 24.4 percent of its cost

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towards total economic activity every

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year so it just doesn't make sense for

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the economy to develop itself that's

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also assuming that this is invested well

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into projects that will accommodate

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economic activity in the nation and not

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just look good to stroke the ego of a

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smooth brain dictator within the country

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or from abroad in the last decade one of

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the largest sources of foreign

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investment into developing countries was

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China through their belt and Road

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initiative the Chinese government would

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approach mostly undeveloped and

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developing economies and offer them

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cheap loans to build infrastructure

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projects that would open them up to the

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Trade Network they were building out in

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the region since creating infrastructure

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is the first step in developing an

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economy a lot of countries were happy to

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go along with this plan the catch was

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that China still wanted the loans to be

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paid back even if they were at low

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interest rates and China had control

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over what was built China heavily

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favored infrastructure that would make

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trade with China more lucrative so even

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if an electrical grid would have been a

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better economic investment than a

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shipping Port the countries involved

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were more likely to get the shipping

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Port today China has a effectively stop

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this lending program and it has become a

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global debt collector trying to get back

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the money from these economies that are

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obviously struggling to pay back even

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the Fairly generous loan terms from a

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Global macroeconomic Perspective China

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has gone from a net provider of capital

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to a net capital recipient which means

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that there are further pressures on

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developing countries around the world to

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find enough cash to pay back their loans

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now global economic conditions are

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impossible for any one country

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especially a small developing country to

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control they can't dictate China's

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foreign policy or the reserve bank's

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interest rate decisions but what they

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can do is carefully choose what projects

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actually go ahead and which ones are

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rejected which is a very difficult task

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fortunately The Economist Douglas North

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and Robert Fogle won the 1993 Nobel

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Prize in economic Sciences for their

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solution to this very problem and it was

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the power of democracy almost all

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advanced economies in the world today

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are some kind of well-functioning

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democracy with the only exceptions being

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oil Rich states which aren't really

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advanced economies anyway they're just

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Rich economies

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Fogle and North were economic historians

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that looked at the period after the

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Revolutions in Europe which either

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deposed monarchs or limited their power

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in favor of Representative systems of

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government that gave way to the growth

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of the merchant class and eventually the

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Industrial Revolution and the modern

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world as we know it today democracies

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that allow people to vote on who makes

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policies means that any decisions will

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need to serve the will of the people and

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any bad decisions increase the

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likelihood of being voted out in the

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next election this motivated government

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leaders to supply services that didn't

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just keep people in line but gave them

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the tools that they needed to build

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industry and create opportunity for more

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potential voters today big economic

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decisions been made in advanced

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economies spend a lot of time Consulting

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with voters over the intricate details

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of what a plan involves for an outside

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Observer this can be a frustrating

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process because it seems like every

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project or piece of infrastructure takes

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forever to implement where a country

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like China can build out entire cities

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in a month the slow process is a

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trade-off to keeping everybody as happy

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as possible but the benefits are that

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effectively everybody in the economy

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double checks the work of the government

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most people will ignore most of what

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their government does but if things are

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implemented poorly or there are

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externalities that impact them directly

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they have some influence to make sure

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it's not done the projects built by

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governments with no direct

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accountability to their people are not

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going to be as carefully implemented

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even if they are made with the best

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intentions of providing a valuable

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public service or economic capacity

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mismanagement does still happen even in

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the most representative of democracies

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but it's normally dealt with by the next

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election so these governments prefer the

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slow and steady approach to doing

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anything most of the countries involved

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in the belt and Road initiative were not

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strong democracies so the level of

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consultation and careful thinking done

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before agreeing to whatever deal they

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were offered was a lot lower even within

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China since small government Ministries

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can Greenlight large initiatives there

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are an abundance of projects that

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achieve basically nothing but being a

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massive waste of resources the power of

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representational government and its

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ability to Foster strong economic

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performance demonstrated by North and

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Fogle in their Nobel prize-winning work

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also went on to inspire the very popular

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book why Nations fail which has some

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criticisms but is definitely a good read

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so those are the fundamental reasons why

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developing economies in particular fail

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but it still leaves the question of why

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are they failing now

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the institutions lending billions of

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dollars to governments all over the

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world to fund Economic Development

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aren't dumb they won't lend to an

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economy unless they think they will get

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their money back poor economic

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management bad Investments and even

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corruption can put National economies

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into vulnerable positions while slowing

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economic growth but they won't cause a

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Collapse by themselves because lenders

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won't give them enough for them to not

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be able to pay back their loans some

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economists say that they won't give the

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countries enough rope for them to hang

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themselves which is a pretty dark

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metaphor but you get the point this is

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assuming that everything stays the same

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even if the same means lots of debt and

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bad economic decisions an economic

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collapse is kind of like a fire there

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can be lots of fuel and oxygen but

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nothing's going to happen until there is

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a spark the spark in this case is an

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economic shock economic Shocks come in

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two broad classifications Supply shocks

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and demand shocks it just means anything

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that unexpectedly changes these Market

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forces a supply stock could be something

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like an industrial area being hit with

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an earthquake that destroys all of the

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factories that would cause a rapid an

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unexpected drop in the supply of goods

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in that economy and could cause major

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issues if the country had existing

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economic weaknesses a demand shock is

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something like the entire population

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reading about a terrible news story and

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being too afraid to go out and spend

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their money because they want to be able

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to save and make sure that they are

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secure if things get worse businesses

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wouldn't be able to sell their goods and

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services so they wouldn't be able to

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hire staff so unemployment would rise

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and the economy would be stressed

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putting pressure on any existing

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weaknesses shocks can also be an

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unexpected increase in Supply or demand

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which long term would be a good thing

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but can still put pressure on economic

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systems in the short term if tomorrow

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the supply of housing tripled because

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someone invented a new way to build more

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efficiently on the same amount of land

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the price of housing would drop and have

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knock-on effects throughout the entire

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economy long term a greater supply of

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housing would still be a good thing but

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it would cause problems in the short

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term the economic shocks of the past

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three years are obvious if an economic

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collapse needs a spark then the global

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pandemic and the economic response to it

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were a lightning strike these things

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also take time to happen as countries

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negotiate their debt and seek assistance

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from International organizations like

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the IMF and the World Bank which try to

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stop economic failures before they can

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spread to other countries there is a

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good chance that unfortunately we will

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be seeing a lot more National Economic

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crises over the next few years as the

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world recalibrates from a bumpy start to

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a new decade even though a lot of these

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changes will be a net positive going

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forward and the world as a whole will

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continue to be a more economically

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prosperous place that growth will as

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always benefit some more than others

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check out the video linked on screen

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next or if you prefer to listen to these

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videos we make all them as well as full

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interviews with world-class economists

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available on our Spotify page thanks for

play15:14

watching mate bye

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Related Tags
GlobalEconomyEconomicGrowthDevelopingCountriesEconomicCrisisInequalityPandemicImpactInternationalDebtInfrastructureInvestmentDemocracyEconomicsSupplyDemandShocks