Why Nations Fail? | Economics Explained
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
- π Global output has significantly increased, with the world expected to exceed a GDP of $100 trillion for the first time.
- π 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.
- π Developing economies are more prone to economic breakdowns due to their reliance on market output and vulnerability to external economic shocks.
- π¦ Advanced economies have advantages such as valuable industries, attractive living standards, and the ability to fill skill shortages quickly, reducing the risk of collapse.
- π° Developing countries often face higher interest rates and economic pressures when global economic conditions tighten, affecting their ability to repay debts.
- π£οΈ Infrastructure development is crucial for economic growth, and advanced economies have an advantage as their infrastructure is mostly already built and maintained.
- π 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.
- ποΈ Democracies with representative governments tend to make more careful economic decisions due to accountability to voters, leading to better economic performance.
- π₯ Economic shocks, both supply and demand, can be the 'spark' that leads to an economic collapse, especially when existing vulnerabilities are present.
- π 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
π 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.
π± 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.
ποΈ 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.
π³οΈ 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.
π¨ 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.
ποΈ 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
π‘Global economic conditions
π‘National economic crisis
π‘Economic prosperity
π‘Inequality
π‘Developing economies
π‘Advanced economies
π‘Economic shocks
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
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