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.

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

🏗️ 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

🗳️ 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.

🎙️ 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.

Keywords

💡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.

💡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.

💡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.

💡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.

💡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.

💡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.

💡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

global economic conditions over the past

three years have meant that we've spent

a lot more time on this channel talking

about the latest National economic

crisis than we have talking about

interesting economic ideas or how great

Norway is economists are a pessimistic

Bunch because on YouTube and in the real

world most people want to know about

what is going wrong before anything else

but there is reason to be optimistic

total Global output is significantly

higher now than it was before the

pandemic started in late 2019 and either

this year or potentially even last year

the world is expected to exceed a GDP of

a hundred trillion dollars for the first

time ever that means the world is

producing three times as much stuff as

it was just 23 years ago at the turn of

the Millennium in that time we have

added 2 billion people to this planet

which is a lot but it's only an increase

of around 30 percent which means that

the average person out there in the Big

Blue world is twice as economically

prosperous as they were just a

generation ago a lot of that Prosperity

has not been shared equally and as the

world gets richer it also gets more

unequal but in agria life for the

average person today is better than it

ever has been and when economists aren't

talking about the latest crisis most

tend to agree that this trend will

continue now while the world as a single

economy is looking better than ever

there is an emerging trend of more and

more individual economies experiencing

isolated breakdowns that are still

threatening the well-being of hundreds

of millions of people mostly this is

happening in developing economies and

already this year which is not even half

over yet we've had to look at Lebanon

Sri Lanka and Pakistan as economies that

have experienced almost total collapse

there are at least a dozen other

countries in the world right now that

are in varying stages of the same

breakdowns and it's important to

understand why this is happening now as

opposed to two or three years ago when

the global economy was arguably in a

much worse shape so why are there so

many economies facing economic collapse

now are there any common problems with

these economic failures and finally can

economists just avoid these problems to

stop ruining other economies

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the reason why most National Economic

breakdowns tend to happen in developing

economies instead of undeveloped or

advanced economies is because advanced

economies have a lot of advantages over

developing economies and undeveloped

economies are sort of in a state of

constant economic failure the economic

output of undeveloped countries like

Mali or South Sudan is largely informal

with people living lives which are much

more independent of the market than most

other people in the world the

populations of these countries often

live on less than two dollars a day

especially in Regional areas but they

make do because they are able to grow

and collect a lot of their own food make

their own shelter and provide services

to one another living in small

communities without the need for money

as a formal medium of exchange since the

goods that people produce for themselves

are not counted towards National

Economic output figures and even if they

were they'd be almost impossible to

record the macroeconomic figures from

these countries often present worse than

the reality this still happens in

advanced economies as well if you clean

your own home that doesn't count towards

economic output but if you clean someone

else's home and then charge them for it

that does count towards GDP as a service

in developing an advanced economies a

larger portion of people's labor is

dedicated to producing output for the

market rather than themselves this is a

good thing overall because it lets

people specialize in doing one task

really well and producing more for

everybody overall but it does mean that

people are more dependent on the market

and less able to produce everything they

need for themselves like what happens in

undeveloped economies of course that's

not to say that life in these countries

is easy or prosperous by any stretch of

the imagination but it does mean that if

they're recorded economic output Falls

by 20 one year the quality of life for

the average person in that economy would

not be as heavily impacted as it would

be in an economy where people dedicate

most to their labor to producing value

for the market that in turn supplies

them with almost everything they need on

the opposite end of the spectrum

advanced economies have a lot of

advantages that make outright collapses

is very rare advanced economies are

often home to industries that provide

valuable goods and services all over the

world so they have a consistent and

reliable source of foreign income

advanced economies also have high

standards of living which makes them an

attractive destination to Skilled

workers all over the world which means

that they can fill in any skill

shortages they have almost on demand if

an advanced economy needs engineers then

they can just create a few thousand

working visas for engineers and the

roles will get filled fairly quickly by

people attracted to the highest salaries

and better standards of living in

advanced economies depending on if those

visas require the person to keep their

job it can also make unemployment

self-correcting because if the labor

market hits a downturn and needs less

workers then those now unemployed

Engineers will be forced to go back to

their home country to become an

unemployment problem for a developing

economy advanced economies can also

borrow money at lower interest rates and

they can borrow it from their own

populations which are on average

wealthier some advanced economies can

even borrow money in their own

currencies which means that they don't

run into problems with foreign exchange

rates and sourcing foreign currencies to

pay back their loans there have been a

lot of economic collapses that started

with developing countries being

temporarily cut off from their source of

US dollars either because trade slowed

down or just because U.S based

institutions pulled their money back

into their own domestic economy this is

happening around the world right now

because interest rates are higher and

people are more uncertain about the

economic future of a lot of weakened

countries why would a big multinational

corporation take a risk putting their

money into a developing country which

could become the next Sri Lanka or they

could just invest it into government

treasuries which are paying high yields

without any of the risk this also puts

pressure on developing economies because

their governments have to offer even

higher rates on their government bonds

to compensate investors for the risk of

not putting their money into domestic

treasuries where repayments are

basically guaranteed Sri Lanka is

currently paying 24.4 interest on their

10-year government bonds and even that

isn't good enough for most investors

this is really important because it

undermines the role of government in

economic growth

strong Effective Government is crucial

to any economy and one of the most

critical roles that they play is

providing the infrastructure needed for

industry to operate this is stuff like

shipping ports airports roads phone and

internet networks and even education and

Healthcare no industry would be able to

operate competitively without these

utilities just think a company like

Amazon uses ports and roadways to

transport their products all over the

world they obviously use internet

infrastructure to run their entire

operation and they need well-educated

people to build everything investing

into infrastructure that will allow

Industries to exist is crucial to any

economy eventually a lot of these

utilities can be privatized and that has

its own pros and cons but initially it's

the role of governments to build these

out good infrastructure spending should

enable enough economic growth that the

additional tax generated from industrial

activity pays itself back in taxes to

the government this enables the

government to pay back the loans they

had to take out to fund the

infrastructure in the first place

unfortunately in the real world most

governments can't just print their own

money to fund these projects because

they normally involve big International

companies that aren't going to accept

payment and a currency from a developing

country that doesn't yet even produce

anything of value they're going to want

a world Reserve currency like US Dollars

the Euros or increasingly Chinese RMB if

it's a Chinese Construction Company

overseeing the development which is

important to remember and we'll get into

that soon either way advanced economies

have some major advantages over

developing economies in this regard

because a lot of their infrastructure is

already built yes of course constant

reinvestment expansion and maintenance

is necessary but that is still all much

easier cheaper and less risky than

building these utilities from scratch

and hoping that it Spurs enough

industrial activity to pay back the

loans another Advantage advanced

economies have is the lower interest

rate in which they can borrow money a

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

3.43 at the time of making this video

investing into projects that will

stimulate that much economic growth or

more is difficult but doable for a

country like Sri Lanka from earlier

though there is almost no

nation-building project that would

contribute 24.4 percent of its cost

towards total economic activity every

year so it just doesn't make sense for

the economy to develop itself that's

also assuming that this is invested well

into projects that will accommodate

economic activity in the nation and not

just look good to stroke the ego of a

smooth brain dictator within the country

or from abroad in the last decade one of

the largest sources of foreign

investment into developing countries was

China through their belt and Road

initiative the Chinese government would

approach mostly undeveloped and

developing economies and offer them

cheap loans to build infrastructure

projects that would open them up to the

Trade Network they were building out in

the region since creating infrastructure

is the first step in developing an

economy a lot of countries were happy to

go along with this plan the catch was

that China still wanted the loans to be

paid back even if they were at low

interest rates and China had control

over what was built China heavily

favored infrastructure that would make

trade with China more lucrative so even

if an electrical grid would have been a

better economic investment than a

shipping Port the countries involved

were more likely to get the shipping

Port today China has a effectively stop

this lending program and it has become a

global debt collector trying to get back

the money from these economies that are

obviously struggling to pay back even

the Fairly generous loan terms from a

Global macroeconomic Perspective China

has gone from a net provider of capital

to a net capital recipient which means

that there are further pressures on

developing countries around the world to

find enough cash to pay back their loans

now global economic conditions are

impossible for any one country

especially a small developing country to

control they can't dictate China's

foreign policy or the reserve bank's

interest rate decisions but what they

can do is carefully choose what projects

actually go ahead and which ones are

rejected which is a very difficult task

fortunately The Economist Douglas North

and Robert Fogle won the 1993 Nobel

Prize in economic Sciences for their

solution to this very problem and it was

the power of democracy almost all

advanced economies in the world today

are some kind of well-functioning

democracy with the only exceptions being

oil Rich states which aren't really

advanced economies anyway they're just

Rich economies

Fogle and North were economic historians

that looked at the period after the

Revolutions in Europe which either

deposed monarchs or limited their power

in favor of Representative systems of

government that gave way to the growth

of the merchant class and eventually the

Industrial Revolution and the modern

world as we know it today democracies

that allow people to vote on who makes

policies means that any decisions will

need to serve the will of the people and

any bad decisions increase the

likelihood of being voted out in the

next election this motivated government

leaders to supply services that didn't

just keep people in line but gave them

the tools that they needed to build

industry and create opportunity for more

potential voters today big economic

decisions been made in advanced

economies spend a lot of time Consulting

with voters over the intricate details

of what a plan involves for an outside

Observer this can be a frustrating

process because it seems like every

project or piece of infrastructure takes

forever to implement where a country

like China can build out entire cities

in a month the slow process is a

trade-off to keeping everybody as happy

as possible but the benefits are that

effectively everybody in the economy

double checks the work of the government

most people will ignore most of what

their government does but if things are

implemented poorly or there are

externalities that impact them directly

they have some influence to make sure

it's not done the projects built by

governments with no direct

accountability to their people are not

going to be as carefully implemented

even if they are made with the best

intentions of providing a valuable

public service or economic capacity

mismanagement does still happen even in

the most representative of democracies

but it's normally dealt with by the next

election so these governments prefer the

slow and steady approach to doing

anything most of the countries involved

in the belt and Road initiative were not

strong democracies so the level of

consultation and careful thinking done

before agreeing to whatever deal they

were offered was a lot lower even within

China since small government Ministries

can Greenlight large initiatives there

are an abundance of projects that

achieve basically nothing but being a

massive waste of resources the power of

representational government and its

ability to Foster strong economic

performance demonstrated by North and

Fogle in their Nobel prize-winning work

also went on to inspire the very popular

book why Nations fail which has some

criticisms but is definitely a good read

so those are the fundamental reasons why

developing economies in particular fail

but it still leaves the question of why

are they failing now

the institutions lending billions of

dollars to governments all over the

world to fund Economic Development

aren't dumb they won't lend to an

economy unless they think they will get

their money back poor economic

management bad Investments and even

corruption can put National economies

into vulnerable positions while slowing

economic growth but they won't cause a

Collapse by themselves because lenders

won't give them enough for them to not

be able to pay back their loans some

economists say that they won't give the

countries enough rope for them to hang

themselves which is a pretty dark

metaphor but you get the point this is

assuming that everything stays the same

even if the same means lots of debt and

bad economic decisions an economic

collapse is kind of like a fire there

can be lots of fuel and oxygen but

nothing's going to happen until there is

a spark the spark in this case is an

economic shock economic Shocks come in

two broad classifications Supply shocks

and demand shocks it just means anything

that unexpectedly changes these Market

forces a supply stock could be something

like an industrial area being hit with

an earthquake that destroys all of the

factories that would cause a rapid an

unexpected drop in the supply of goods

in that economy and could cause major

issues if the country had existing

economic weaknesses a demand shock is

something like the entire population

reading about a terrible news story and

being too afraid to go out and spend

their money because they want to be able

to save and make sure that they are

secure if things get worse businesses

wouldn't be able to sell their goods and

services so they wouldn't be able to

hire staff so unemployment would rise

and the economy would be stressed

putting pressure on any existing

weaknesses shocks can also be an

unexpected increase in Supply or demand

which long term would be a good thing

but can still put pressure on economic

systems in the short term if tomorrow

the supply of housing tripled because

someone invented a new way to build more

efficiently on the same amount of land

the price of housing would drop and have

knock-on effects throughout the entire

economy long term a greater supply of

housing would still be a good thing but

it would cause problems in the short

term the economic shocks of the past

three years are obvious if an economic

collapse needs a spark then the global

pandemic and the economic response to it

were a lightning strike these things

also take time to happen as countries

negotiate their debt and seek assistance

from International organizations like

the IMF and the World Bank which try to

stop economic failures before they can

spread to other countries there is a

good chance that unfortunately we will

be seeing a lot more National Economic

crises over the next few years as the

world recalibrates from a bumpy start to

a new decade even though a lot of these

changes will be a net positive going

forward and the world as a whole will

continue to be a more economically

prosperous place that growth will as

always benefit some more than others

check out the video linked on screen

next or if you prefer to listen to these

videos we make all them as well as full

interviews with world-class economists

available on our Spotify page thanks for

watching mate bye