[MUSIC PLAYING]
MARK BLYTH: From the Rhodes Center for International Finance and Economics, this is the Rhodes Center Podcast. I'm the director of the center and your host, Mark Blyth. There was a time not so long ago when it seemed like economic globalization, political liberalization, and geopolitical stability were an unstoppable trio. They supported each other and created an economic and political environment that countries around the world couldn't help but want to be a part of.
Some called it the great moderation, some the end of history. Whatever name you want to give it, it seemed like it was here to stay, which of course, it wasn't. Today, according to our guest, instability in all three of these realms-- economics, domestic politics and geopolitics are creating just the opposite, a vicious cycle of economic and political disorder, which we seem to be ill equipped to get ourselves out of.
Eswar Prasad is professor of trade policy and economics at Cornell University, an author of the new book The Doom Loop: Why the World Economic Order Is Spiraling into Disorder. And on this episode, my colleague Aditi Sahasrabuddhe and I talk with Eswar about this phenomena, which he calls the doom loop. We go into what caused it, why it's so hard to stop, and what it means for the future of the global order. Aditi will be leading the conversation today, but you'll hear me from time to time as well. Here's our conversation.
[MUSIC PLAYING]
ADITI SAHASRABUDDHE: Eswar, welcome to the podcast, and welcome Mark, as well. It's nice to have a little group chat here.
ESWAR PRASAD: Thank you Mark. And thank you Aditi for hosting me at Brown. And I'm looking forward to our conversation.
MARK BLYTH: Yes, it's nice to be the guest on my own podcast. But not really the guest, more I'm running shotgun.
ADITI SAHASRABUDDHE: Eswar, can you tell us a little bit more about what is the doom loop and why we found ourselves in it?
ESWAR PRASAD: So the concept of the doom loop is that economics, domestic politics, and geopolitics are stuck in this negative feedback loop where they're bringing out the worst in each other rather than positively reinforcing each other. And this positive reinforcement is not just a figment where one would hope that there is positive reinforcement. There was a period not too long ago during the Two Thousands for instance, when it seemed like these forces were all moving in the same direction.
If you thought about globalization, for instance, which means rising trade and financial integration between countries, there was a sense that this was a positive-sum game where all countries could benefit from trade and financial flows between them, could jointly prosper, and this would be an offset to the zero-sum game of geopolitics, because in geopolitics, intrinsically one country is greater influence comes at the expense of another country. So there was a sense that maybe economics would triumph, so to speak, and would make geopolitics less fraught.
But what we have found instead is that the dynamics of globalization were such that as any economist will tell you, free trade has enormous benefits. But it did create a lot of dislocations that we did not pay enough attention to, so many workers lost jobs. And they lost jobs not just because of globalization, but there were other forces in play at this period. Things like technological change and so on.
But there was a sense among people who were getting laid off that not only they losing jobs, but they were also losing the opportunity to clamber back the economic ladder. And the reason they felt the system was unfair and rigged against them was that they saw that the elites, the political and economic elites, however broadly defined, were not only accruing most of the benefits of globalization, but were also able to tilt the political system such that it worked even more in their favor.
If you think about regulatory and tax policies in the United States, for instance, these increasingly favor those who are already economically advantaged. So the sense of fundamental unfairness in the system meant that even though there were aggregate benefits to be had from globalization, it ended up infecting domestic politics in a very adverse way.
And of course, we are seeing that the infection of domestic politics and its very adverse turn has also affected geopolitical relationships, especially the way the US, with this much more populist nationalism that has become pervasive here, essentially shunning other countries, including long-standing allies. So now, you see how the economic forces that could have been positive turned malignant, affected or infected domestic politics, which in turn is affecting geopolitics. And then the cycle begins again in a way that each of these elements brings out the worst in each other.
ADITI SAHASRABUDDHE: So on that point, and I know you had started the book with the more positive vision for the world. But if we think about these three aspects-- the economy, domestic politics, and geopolitics, and they've always fed on one another, is this doom loop something that was just an inevitable shift, a correction towards all the inequalities that had been brewing since the Nineteen Nineties? Or is this something that perhaps for some has come out of, I wouldn't say nowhere, but is a bit more surprising?
ESWAR PRASAD: That is an interesting question whether the doom loop was inevitable. I think not. Again, going back to very recent history, if one thinks about the period when the Soviet Union fell apart in the Nineteen Nineties and it looked like the paradigm of liberal market-oriented democracies had won in this civilizational battle, and that would become the paradigm that every country would aim towards. It certainly seemed very persuasive. In fact, there was a notion of the end of history in the Two Thousands because this paradigm was seen as having won decisively.
What I think many of us, including myself, fail to recognize is that there were some intrinsic fragilities in the process. It turns out that when we think about institutions, for instance, those have proven to be somewhat more frail, partly because institutions themselves, including rules, need norms to support them. And we are finding out that those norms can also be very fragile and are not quite the robust entities we had expected them to be. So it is not in my view, inevitable, but the sense that we are now in a situation where the political system is viable to capture, which creates a sense of unfairness, I think is really at the heart of what we're experiencing today.
And it's worth making another point in this context that here in the United States, it's easy to see this as a moment that is very particular to the United States, particular to Trump. It's not. In fact, I had finished the first full draft of my book in October of Twenty Twenty-Four and thought maybe it was a little too dark. But even since then have unfortunately, validated the thesis of my book. So this is not a book about the US. It's not a book about Trump. But we see these forces playing out even in the interregnum between Trump 1 and Trump 2, and also in many other parts of the world, particularly in many countries where there is a pooling of politics to the right and populist nationalism getting a lot more traction.
ADITI SAHASRABUDDHE: So you talk quite a bit in the book about competition. Competition has been seen as a good thing for the longest time. And there's something that's changing in how competition is playing out today, which is it's not just the market competition where the best idea rises to the top, but it seems that we're seeing competition between states over just wildly different views and beliefs. And so what do you see as some of the things that might be resonating in global politics today in terms of competition going south? And again, how do we think through getting out of problems?
ESWAR PRASAD: So well, I think as an economist, my instinctive view is that competition is good because it tends to breed efficiency, it tends to discipline the competing parties, it promotes innovation, and in general, it promotes stability when you don't have one power, either economic or political, that is dominant. But what we're seeing right now is much more destructive competition, where essentially, rather than trying to aim for better outcomes, we are shifting towards the lowest common denominator in many dimensions.
So if you think about competition between countries right now, one would like to see countries trying to aspire towards higher standards in terms of economic outcomes, in terms of market structures, in terms of the political process. Instead, we are seeing a rush to the lowest common denominator-- much more authoritarian forms of government, democracies that ostensibly give voices to the people, but in fact are very subject to political capture and really drown out the voices of the masses. So I worry that we are at a phase right now where because of the dynamics of the doom loop, we're essentially entering a phase of very adverse competition rather than constructive one. And that I think we are seeing in multiple spheres-- economic, political, and geopolitical.
ADITI SAHASRABUDDHE: And so in that vein, as you write in the book, that middle powers have always had this pragmatic approach to alliances. They're more issue-based, they're more transactional. And that policy or that approach has gone on much longer than this period of the doom loop. So is it really the pragmatism that is becoming the problem in this context, or is it that they are being pragmatic that's creating and feeding into this doom loop? So is it really the context that's made the shaping of middle power lines a more contentious issue today, or has it always been so and we're seeing it manifest now?
ESWAR PRASAD: So my view of the world right now is that there are really two superpowers. There is the US and there is China. Russia sometimes gets mentioned as a superpower, but it's really only in the military sense. And even that is weakening. So in terms of economic and financial power, it's really not a major player. The problem for the rest of the world is that these are both very unsavory alternatives. The United States has become seen as an untrustworthy and unreliable ally. On the other hand, China, which wants to project itself as a defender of multilateralism, of the rules-based world order of globalization and free trade, is not fully trusted by most countries because of its very weak institutional framework.
So this pragmatism has, in a sense, been forced upon all the countries that are in the middle, because they cannot entirely distance themselves from either of these two superpowers. But at the same time, they don't want to align themselves too closely with either one, because that carries a lot of risks as well.
India is a very good example. In India, of course, has a long history of what is called non-alignment even during the Cold War period, for instance, between the US and the Soviet Union, India tried to remain non-aligned. That is not aligning itself with either great power. And that to some extent has served India well. But it also means that India is not able to develop deep alliances that will protect it in both good times and bad. And of course, India is now a major economic power in its own right, so perhaps, it doesn't need that protection.
For all the other countries caught in the middle, especially the smaller ones. It's a much more complicated balancing act, because if you take countries in Asia, for instance, countries like Vietnam, the Philippines, Thailand, or even developed economies like South Korea, they have strong economic and political and financial entanglements with China, but they don't want to go too close into China's embrace. At the same time, they don't have an alternative that they can rely upon. Because Japan is a declining power, and the US is not seen as reliable anymore. So they teeter back and forth between the two extremes. And that's why this pragmatism that is forced upon them does not enable them to cohere and to serve as a stabilizing force in the world order.
MARK BLYTH: So let me jump in here for a moment. I want to go back to something you said in the talk that you gave here today, which was great, but you've also just alluded to via the discussion about India there. And what you said in the talk was that we've had rivalries before. Those rivals at one point-- I'm old enough to remember when Japan was the big rising threat, and that dissipated. The EU at one point might have been Enemy of the Month Club, but now it's China. And China's totally different. It's a very different beast. And therefore, if you will, the zone of compromise, and the fundamental values that you would expect to reduce conflict, reduce tension simply isn't there. And I think that is very insightful.
But let me play devil's advocate this way. If I'm a Global South country, the United States wants me to buy more oil and gas, remain on the dollar, tell me what to do, tell me how to run my economy, tell me how to run my society. During the Two Thousands in particular, that was really a very strong tendency with the promotion of American view of human rights, et cetera.
And China's paneling my country and giving me green tech. And all of that is not just decarbonizing my economies, it's reducing my current account vulnerability. I don't need as much oil, therefore, I don't need as much dollars. And the Chinese give me money and they don't tell me what to do. So why isn't this as far as the rest of the world's concerned, a good thing?
ESWAR PRASAD: Well, Mark, you're a very good advocate for the devil. And certainly, this is a very compelling argument. And it's one that has drawn many countries around the world closer into China's embrace-- the prospect of money, in particular coming to countries that have no access to money from either other private markets or from official institutions, and to have that money coming in with no strings attached is a very tempting proposition.
The question is whether this is really going to benefit the masses in these countries. It's certainly going to benefit the leaders of these countries. But a lot of money from China sometimes comes in the form of debt with rather usurious conditions. It's not clear that these are projects that are necessarily commercially viable from the point of view of the countries involved.
In my book, for instance, I gave the example of Sri Lanka, which desperately needed financing for some infrastructure projects. It did get the money. It then realized that some of the projects that China had financed were not really commercially viable, and because Sri Lanka was not able to pay off some of its debt, China essentially gained control of some strategic areas, including a port that has led to Sri Lanka regretting the day that it went into China's embrace.
But having said that, China has certainly had a positive effect in some parts of the world where religious education systems, health systems have been improved thanks to China's money. But it is something of a Faustian bargain. And this is where the choice again becomes a very difficult one for many of these countries, because they recognize that China does come with money, does provide that money without too many strings attached. But if one was to think about it in terms of the long-term welfare of these countries, you can see why there is still some hesitation into going too deep into China's embrace. Because again, the institutional framework in China does not engender a great deal of trust. So to a lot of the world, China might actually look like a better alternative than the US, but it's still not a very great alternative.
ADITI SAHASRABUDDHE: So in that situation, where do countries look? As you said in your talk today, industrialized countries are lending less and less. They have their own public debt issues. So what is the alternative for the middle powers and the global south in this situation?
ESWAR PRASAD: That's a very difficult question, Aditi, to which there isn't a good answer, and I often get asked this question. One of my recent talks, there was a gentleman, a senior policymaker from Iceland, saying, we're trying to do the right thing. How do we protect ourselves in the midst of this maelstrom? And the answer at one level is straightforward, but it's also very simplistic. All countries can do is basically try to number one, diversify their relationships. If you're a business in Iceland want to think about diversifying your sources of supply of raw materials and intermediate inputs, but also your final markets for your goods and services.
Likewise, diversify your geopolitical relationships, and you build self resilience. And that might mean, improving your macroeconomic policies, both monetary and fiscal policies, and also improving your institutions so that when the shocks come and there will be shocks come, because this is a very volatile world, you're better prepared to handle them. But ultimately, it's going to be very rough waters. And if you're a small country, even if you do all the things perfectly, you're still going to be buffeted by the stormy waters. And that's the reality we're going to have to deal with.
So I'm afraid there really isn't a very good answer. So all of these strategies, like creating pragmatic alliances with countries that you still get along with on particular issues, increasing self-reliance, diversification, these are all coping strategies that I think countries are beginning to adopt. And it's not just countries, but also businesses that are taking a similar approach.
ADITI SAHASRABUDDHE: I wanted to back into something you had also mentioned in your talk today, which is you said that you were at Davos and that what Mark Carney was talking about reflects a lot of what the key arguments of this book are. And I know we have some more predictable answers than others, but I'm curious to hear who are the voices in the room that would disagree with this thesis? And I also wanted to why has it taken the global leaders this long to speak up about what they see as effectively the doom loop as well?
ESWAR PRASAD: I think there was a sense of hopefulness that eventually the system would self-correct, that in particular, the corrective mechanisms that usually work in a democracy would bring some balance back in order. And when Trump was elected president the first time, it was seen as a bit of an aberration. And when he lost power at the end of the first term, there was a sense that order had been restored and this was a momentary blip in American history. And we've had many of these blips in the past, and things would start returning to a semblance of order.
That notion, I think, is now gone. And it's important, again, to remember that this is not just a dynamic that we see in the US, but it is a dynamic that we see in many parts of the world, including bastions of liberal democracy. There are many countries in Europe that are shifting much more to the right. And this notion of, this politics of resentment, where essentially skillful politicians are able to blame the other, and the other could be defined as domestic, economic, and political elites, or it could be immigrants, or it could be China, that is a very powerful message that is leading to this notion of populist nationalism becoming much more pervasive.
So I think we are at a particularly fraught moment. And there were some of these dynamics in play earlier. But I think we are right now in a position where these three elements that I spoke about-- the economics, domestic politics, and geopolitics have become intertwined in a way that is very difficult to separate. So we are at a particular moment in history when economic and financial integration has proceeded to a very significant level, and that is intensified the doom loop. Again, we welcome these forces once upon a time because we thought about them as positively reinforcing each other. That sense is now gone.
MARK BLYTH: I want to return to something that Aditi suggested earlier, which is that this might have been preordained in a very specific way. Dani Rodrik famously has that troika, the trade off. Basically, capital mobility, deep economic integration on a global level, and your politics is local. So that seems to capture a lot of this in the sense that if the economy is above and beyond the control of local economic elites, and then those local economic elites are part of a democracy where they're told you need to fix this, and it turns out they can't. And we seem to see a lot of that just now. That is going to create enormous potential for backlash, which can be weaponized in lots of different ways.
For example, we just saw by election in the United Kingdom where the Greens, who have never won anything, actually just go right past the governing Labor Party and the insurgent Reformists. So I'm just wondering if there's actually a deep contradiction in here that the two halves globalization means to give up on democracy. And we knew this by the end of the gold standard. That the minute democracy showed up, you can't do that anymore. But we pretended we could get away with it this time. What do you think of that?
ESWAR PRASAD: I think globalization has turbocharged some of the underlying fragilities, the intrinsic fragilities of market-oriented liberal democracies. I don't think it was inevitable. I think it was because we did not pay enough attention to the distributional consequences. And as I argue in the book, globalization is one part of it. But there is this element of unfairness at the domestic level, but also the international level related to the rules of the game that I think is very important.
And it's not just globalization. There are other forces like technology, the roles of the middle powers as well that are all exacerbating these, when in fact, we thought that while globalization might spin out of control, there are all these other factors that could keep things in balance. But the point of my book is that each of these potentially stabilizing forces has ended up, in a sense, reinforcing the doom loop dynamics. So it's above and beyond globalization, although that's certainly a very important part of the story.
ADITI SAHASRABUDDHE: I want to come to the question of currency competition. So you've written extensively of the dollar trap and the renminbi's rise. I'd like to hear where your mind is on these questions today, and how the doom loop might maybe either shift our thinking or embed it further as to the dollar centrality.
ESWAR PRASAD: There is a very clear, compelling and logical narrative that the world should be shifting away from the dollar because the dollar's dominance has had some benefits for the US, but also some costs. And for the rest of the world, it's not been great in many ways. Certainly, it's provided an anchor, one might argue, for stability in very troubled times, but one might also argue that it has created that instability by itself because it allowed the US to essentially run large current account deficits or trade deficits, and borrow from the rest of the world to finance those deficits.
And it's also meant that American policies, especially monetary policies, have effects on the rest of the world. Sometimes it can be positive. Very often they are very negative. And right now, the world sees its entanglement with the dollar as creating economic risks, but also geopolitical risks. So there is a desperate desire to diversify away from the dollar.
The problem is that one needs something to diversify into if one is thinking about an alternative currency for International payments, or to hold foreign exchange reserves, which are Central Bank's rainy day funds and the alternatives have proven very fragile. If you think about the eurozone, there are many economic fragilities, but also centrifugal forces that are pulling the zone apart.
China wants to have its currency there and be a major player in global finance, but it's not willing to allow free flows of capital across its borders. It wants to maintain control of its exchange rate rather than let it be market determined. And because of China's institutional structure, the lack of checks and balances, the lack of an independent central bank, foreign investors don't necessarily trust China. So for all its flaws and weaknesses, the dollar still seems to be the only game in town.
Now, one might argue that I've spoken a lot about destructive competition. Maybe having one currency is good for the world because, again, it gives everybody one very clear anchor that they can focus on. In normal circumstances, that may be true, but right now it means that the United States is one geopolitical and economic weapon that it is wielding in a quite arbitrary fashion against rivals, but also allies. And it also means that all the volatility in US economics and politics immediately spills over into the rest of the world through the dollar channel. So in fact, this is one area in which there hasn't been as much competition as might be desirable, but that also is having adverse effects.
MARK BLYTH: So rather than just, again, I'll just play the devil's advocate. She knows I'm already barking up the devil, which is good. I like that one. Doom loop implies a terminal point. Doom loop implies doom, and we could recast this essentially as volatility. It's just a bit more volatile. So if we start in the '90s, we have the unipolar moment. We have American dominance. We have that whole period, if you will, cultural, and economic overreach that comes a cropper, as you note well in the book, with the financial crisis hiding hidden fragilities.
We then get the central banks to basically just keep the show on the road by adding infinite liquidity until that becomes ineffectual, causing a huge wealth inequality skew, et cetera, et cetera. So basically, we've had this period, well past the happy times. And so 20 years into this, we've got, as you note, elite capture, skewed income and wealth, failed economics, massive inequality generator. Why would we expect this to hold together? Surely, this has to fall apart in order to be rebuilt, doesn't it?
ESWAR PRASAD: The doom loop dynamics are certainly reinforcing the worst in each of these elements that I spoke about. And there is a question about how this ends. Do we find a smooth path out of this where we return to reason and political systems get rebuilt, institutions get rebuilt? Or does it end in some sort of catastrophic fashion, after which we get a rebuilding? Again, I'm hopeful that it will be the former, but worried that it could be the latter.
And the concern I have about the doom loop dynamics is that if one thinks about what is necessary to get us out of it-- more engaged citizens, better national leaders who will help us see beyond our short-term prejudices and fears and better institutions, it doesn't seem obvious that the dynamics of the doom loop will allow any of this to happen.
And one question is whether this is consistent with what we see on the surface. If one thinks about how economies are doing, at least over the last year or two, and how they're likely to do in the immediate future, if you think about how financial markets are doing, both in the US and in the rest of the world, everything looks pretty good.
The problem is that there are all these tensions and stresses building up beneath the surface. And I worry that much like in the period of the early Two Thousands when things looked very calm on the surface, but financial system stresses were building up underneath the surface, right now we might be in a period where it's not just financial system stresses, but very deep stresses to the social fabric that are in play and that could end very messily. Again, hope that will not be the case, but I don't see any easy way that we can extricate ourselves out of the doom loop.
ADITI SAHASRABUDDHE: And so something that I found to be a common theme throughout the book, and what we see in global affairs today is the overall secular decline in trust, whether it's at the societal level, between individuals, in elites, in institutions. But one of the big points I took away is institutions might still be the answer to getting out of the doom loop. But how do we do that if there's no trust in them? And how do we start to restore trust at all of these levels that make it really important for the doom loop to not be perpetuated?
ESWAR PRASAD: That's a really important question, Aditi. And you were there at the origins of this book, so how this book has evolved over time. And institutions were the answer in the more cheerful version of the book that I plan to write, both domestic institutions and international institutions. And as you say, the underpinning of institutions themselves is trust. And they need to be seen as credible, legitimate, fair, and transparent, which is a lot.
But we did have a set of institutions both at the domestic level and countries like the United States, but also international institutions that seemed to have many of these characteristics. So one view of the present moment is that we are seeing these institutions crumble before our eyes, and there is this negative feedback loop between the institutions crumbling and the lack of trust in them because it's a loss of trust in the political process, for instance, that is leading to the erosion of these institutions.
But one could, in a more optimistic framing, also think about this as an opportunity at a time when rather than just fixing these institutions at the margin, one can start thinking about trying to build them in a much better fashion. And of course, there are both domestic and international institutions important here. So at the domestic level, it includes the rule of law, a system of checks and balances, a free and transparent press, and even specific institutions like an independent central bank. And among international institutions, there could be those that mediate world trade, finance, and also many other issues, including geopolitical conflicts.
So I think we have a set of principles that are necessary to rebuild these institutions, and we could think about what they should look like in a way that meets the criteria that I laid out earlier, but also evolve over time in response to changing conditions.
The question is, who is going to do the recreation of the rebuilding? At the moment, we do not have a good answer to that. And I think the answer really lies in citizens getting much more engaged in the political process and finding ways to bring leaders up through the system who can actually appeal to our better selves rather than to our fears and prejudices. I have no illusion this is going to be straightforward or easy, but I think we have to start walking down that path.
MARK BLYTH: A final question?
ADITI SAHASRABUDDHE: I have one final question that's actually very academic, but I think something that strikes me in this book is that you were thinking as an economist that some of these assumptions or theories that we've had are not holding up today. I'm curious about how much the economics profession is paying attention to these dynamics and having a rethink moment of whether our ideas of competition still hold our assumptions that competitors have the same goals and are like minded, clearly not in place today. So in terms of the policy world that listen to economists and academics, where do we go from here? And what kinds check in do we need to have with the discourse, and how that translates into policy?
ESWAR PRASAD: That's a hugely important question for my discipline, Aditi. And it is something that at least some of us are taking seriously. In fact, there is a whole new branch of research developing called geoeconomics, which tries to take on board the notion that you cannot separate economics from geopolitics. In the period leading up to the global financial crisis of Two Thousand and Eight/ Two Thousand and Nine, there was a sense that we could study macroeconomics, especially monetary policy, as separate from financial markets.
And of course, it's not that we economists didn't realize that there were connections between the two. And there was some theoretical models and some empirical work connecting the two, but it wasn't an intimate connection. After the global financial crisis, we came to the realization that you cannot separate these two-- that financial markets and monetary policy have to be studied together because the connections are too deep, too ingrained to separate the two of them.
I think we are at a moment right now where we need to think a lot about geopolitical feedback effects as well, onto economic policies. The problem is that the more realism you introduce into economic models, the less sharp the insights are that you get from them. So I think as economists, what we're grappling with is this tension between trying to take on board more of these complexities of our economic policies and now being undertaken and implemented in an interconnected world where it's not just about economics, but it's about domestic politics and geopolitics, but at the same time trying to draw insights that are sharp enough that they have some practical value. It's an enormous challenge, and I know that some of my colleagues are trying to rise to it.
ADITI SAHASRABUDDHE: So I would say welcome to international political economy.
ESWAR PRASAD: Indeed, certainly in your field, you think much more about these issues in a broader way, and perhaps, we are moving towards that as well.
MARK BLYTH: I think that's excellent. Thank you for coming to Brown. Thank you for the talk. Thank you for the chat.
ESWAR PRASAD: It's been my real pleasure, Mark. Aditi, thank you so much for hosting me. And I enjoyed our conversation.
ADITI SAHASRABUDDHE: Thank you.
[MUSIC PLAYING]
MARK BLYTH: This episode was produced by Don Richards. I'm Mark Blyth. If you like this episode, leave us a rating and a review on Apple, Spotify, or wherever you listen. And be sure to subscribe to the show while you're at it. We'll be back soon with another episode of the Rhodes Center Podcast. Thanks for listening.
[MUSIC PLAYING]
