What's Causing This Wave of Economic Collapses? | Economics Explained

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 this episode of Economics explained was brought to you by short form instead of spending days reading a single book short form offers super comprehensive guides to thousands of non-fiction books that you can read in just a few hours they cover topics like Finance business economics and more short forms condensed Library still gives you all the most important information from famous titles like why Nations fail a fantastic book that I've used to research this video it's also a great way to pick out the next book you want to read from beginning to end use my link on screen now to get a free trial of short form plus three months off the annual subscription 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

Channel: Economics Explained

Views: 756,862

Keywords: economics, economics explained, why nations fail, economic collapse, inflation rate, causes of recession, housing bubble, cost of living, economic recession, supply and demand

Id: IAHUFleQBZI

Length: 15min 21sec (921 seconds)

Published: Sun Apr 23 2023