Thank you, Aditi. A hungry audience is a dangerous audience. We'll see how this goes. But it's really a pleasure to be back here. There was about a five-month period in my life when my life was defined in this triangle between the graduate center where I was living, Robinson Hall, and the SciLi where I did most of my studying. So it's a real pleasure to be back here in these environments under slightly different circumstances.
I have a confession to make. This is not the book I planned to write. In 2023, I started thinking a little bit about what was happening around us in the world, what the shape of the new world order might look like. And of course, I'm an economist, so I think about the economic and financial order. And I spent a few months, a few very exciting months, reading up. Reading up not in economics but in fields that typically I don't read that much in: politics, international relations, history. And for about six months, my co-authors on my academic papers didn't hear much from me because I disappeared. And at the end of this period, which was very refreshing and stimulating, I had a very clear thesis, and this was the thesis.
I had to decide about how far back I wanted to go back in history in telling the narrative, and I decided that I was going to focus in the relatively short period starting in the 1990s, where with the breakup of the Soviet Union, the United States became the dominant power in practically every respect as an economic, military, and financial power. We are now in a position where economic power, at least, is much more broadly distributed, and to an economist, instinctively, competition is good under most circumstances because it leads to more efficiency. It leads to more discipline because no country can get away with running amok with its powers. It also leads to more stability.
And the plan for the book was to think a little bit about all of the forces that would take us back towards this more stable equilibrium, with the present period where there is a lot of turmoil essentially being seen as a transition period where we're experiencing a lot of volatility because we are in the midst of transition. That was the book I started out to write in early 2024. And actually, Aditi was present at a book workshop when I talked through some of this, and I had a clear title. In fact, she gave me the title for the book which I was going to write. But as I worked through the logic and the arguments, I came to a much darker conclusion that each of the elements that I thought would promote stability was in fact going to promote instability.
So the defining theme of the book became one where three critical elements—economics, domestic politics, and geopolitics—are stuck in a negative feedback loop. So let me give you one example which comes from the element of globalization. Once upon a time, not too long ago, globalization was seen as a positive-sum game. Essentially, countries through their trade and financial relationships could mutually benefit from these relationships. And this positive-sum game of globalization, where countries could prosper together, would be an offset to the intrinsically zero-sum game of geopolitics.
Because in geopolitics, one country gains influence, it has to come at the expense of another country's influence. Economics, on the other hand, could be a positive-sum game, and that's how it played out for a while. And then things changed, and why things changed is a very important element that we will come back to. But things changed, and right now, of course, we're living in the midst of that change, where we see that even this positive-sum game of economics, especially trade, has come to be seen as a zero-sum or even negative-sum game, where one country's gains come at the expense of another country. So the balancing force that used to keep geopolitics in check has essentially gone away.
And this happened in a very particular set of circumstances. And why this happened is important because if you go back to the 1990s, the 2000s, this was the period when China started integrating into the world economy. Even the early 2010s, there was a sense that this was a positive-sum game that would have very large benefits. And we economists will tell you that the benefits are very large and they are measurable. But what we did not pay enough attention to is the fact that these benefits were not evenly shared, either within countries or between countries. There are many countries that, as a result of financial flows, ended up taking on too much debt, facing debt crises. But even within countries, including the United States, there was a sense that a lot of people got left out.
Now, when people lose jobs, if their industries are not doing well, that is the process of natural churn in a market economy. Some industries do well, some industries don't do so well and decline. Some firms do well, others don't do well. So this is a very natural process. But what I think is really important is that many of the disaffected felt that it was not just that they were losing economic jobs, but that they were losing economic opportunity, and what they saw in particular was that the political system was being subject to capture.
So what they saw was that globalization—and of course there were other things happening during the 2000s, the 2010s, and to this day, including technological advances—all of these changes are generating enormous aggregate gains. But these gains are largely being accreted by a very small share of the population, the economic and political elites, however broadly defined. And it is these elites who are visibly also able to capture the political process. We can see, for instance, in the US, regulatory policies, tax policies are all tilting in a direction that allows those who are already privileged to accrue even more of the privileges. So as you can see, what used to be a very positive force, globalization, has started infecting domestic politics in a very particular way.
And then there is the connection with geopolitics as well. Once upon a time, American businesses used to see China as an opportunity. As China started opening up to the world economy with its accession to the World Trade Organization in 2000, there was a sense that China could be a very important part of global supply chains being set up by manufacturers. China was seen as a very important market for multinational firms to sell their products into, for American financial institutions to sell their services, because after all, China had a rapidly expanding middle class that wanted higher quality goods, higher quality services, and there was a sense that this was a real opportunity.
So during the 2000s, when there were certainly some geopolitical frictions between the US and China, and also the sense that China was not necessarily playing by the rules of trade because it had gotten access to markets around the world but was not providing proportionate access to its own markets, there was a sense that the businesses would essentially keep things in order because American businesses and, of course, Chinese companies operating in the US wanted to make sure that there was some sort of amity between the two countries.
That stabilizing force is gone. And this comes to another very important element about why we have this doom loop dynamics, which is that there is a sense that not only was there unfairness in terms of how globalization played out domestically, but on the international sphere, we can see that China is seen to have made off with many of the benefits of globalization while not taking on the burdens that you would expect from such a large economy in terms of opening up its own markets to foreign exports.
So the sense of fairness, I think, becomes really important as we think about why we are stuck in the doom loop, because essentially this element comes into play in how voters view both the domestic political aspects as well as the geopolitical aspects. So this is where now we can see how the economic forces, particularly the distributional consequences that we did not pay attention to perhaps as economists, has infected domestic politics, which in turn is having a pretty significant effect in terms of geopolitical relationships as well. Hence the doom loop.
When you think about it, economics, domestic politics, and geopolitics—these three elements I mentioned—go along parallel tracks, and of course they regularly intersect with each other. But I think we have come to a point right now where it's really difficult to separate these out, and one really needs, as scholars, as people who are trying to influence policy, we cannot separate them anymore. So this is one element, globalization, which could have been a positive reinforcing force, but which I argue in my book has turned into a destabilizing force. What are the other forces at play? One is the rules of the game.
If everybody agrees upon a common set of rules, then you can have much more stability because you know anytime somebody starts to get out of line relative to these commonly agreed-upon rules, then there are forces that bring them back into line, and we can generate much more stability. What is happening to the world of rules now? The United States in the post-war period has been instrumental in setting up institutions like the United Nations, the IMF and the World Bank, the International Court of Justice, and a variety of others that I think have been really important in terms of anchoring global prosperity and stability.
And what do we have right now? We have the United States, again because of these negative political dynamics domestically, essentially receding from these institutions because it feels that its national interests, very narrowly defined, are not being promoted by these institutions. At the same time, you have the emerging market economies feel that these institutions, in particular an institution that is very dear to my heart, the International Monetary Fund, and also its sister institution, the World Bank, there is the feeling among these emerging market economies that these institutions, which still determine the financial rules of the game for financial flows, capital flows, and so on, are really in the hands of the advanced economies.
Why is this? Because logically, given the increasing economic power of the emerging market economies, they should have a much greater say in the running of these institutions in the form of greater voting power. But the old powers don't want to give it up. The United States, it turns out, still would accrue a fair amount of the voting share because it is the one economy among the advanced economies that has done quite well over the last two decades. But if you start looking at where the voting shares are of countries like Japan, the European economies, and so on, relative to their economic size, they have much more voting share.
So for instance, the Chinese economy is now about four times the size of the Japanese economy, but Japan has a slightly larger voting share than China. So this has led to the emerging market economies feel that they need to have institutions that support their rights, and they are disengaging, but in a very different way. They are first of all trying to change from the inside some of these institutions, but at the same time they are setting up their own institutions.
One piece of pizza has made it into the room. This is going to change the entire dynamics of the talk, but if any of you... >> no one moved. Or there have to be consequences, Mark.
Okay. So it turns out that these emerging market economies have decided that they don't want to play by these same rules. So they're going off and setting up their own institutions. China set up the Asian Infrastructure Investment Bank. The BRICS economies, the five largest emerging market economies—have the five most significant emerging market economies, not necessarily the largest in terms of GDP—have set up the BRICS Development Bank, which is a direct competitor to the World Bank in some respects, or at least aims to be.
So now one might argue again that you have competition between institutions. Maybe this is a good thing. Maybe it will lead all these institutions to improve their governance standards, maybe start treating countries more fairly. But there is also the risk that in fact we might have a rush to the lowest common denominator, loans being given out with fewer conditions, which may sound good from the point of view of the recipient countries, but it means that the recipient countries end up not doing what is necessary to fix their economies.
In addition, what I think is really important is that now we have fragmentation in terms of the rules of the game. So rather than cohesion through a common set of rules of the game, we have much more dissension right now. So that too has become a potential source of instability rather than stability.
Then there is one group of countries that could play a stabilizing role: the middle powers. So who are the middle powers? Now, before one thinks about the middle powers, one has to think about who the superpowers are. And when I give these talks, I'm often asked, well, isn't there a third superpower between the US and China, which of course is Russia? Yes, Russia is a military power, although a declining one even in that dimension. It has a lot of nukes, but seriously, it's not an economic or financial power. So it's really between these two countries.
Everybody else is in the middle. This makes my European friends very unhappy when I say this. But the reality is that Europe has the potential to be a great power, but it is riven by many of these dissensions domestically. And as we can see, even within the Eurozone, while Europe certainly has the economic heft to be a great power, unless, you know, Trump says he's going to take over Greenland, when Europe quickly stiffens its spine, it's not shown the level of cohesion you might want of a great power in terms of its economic power or in terms of its ability to speak with one voice on major geopolitical issues. So everybody else is stuck in the middle.
Now at Davos, Mark Carney gave this very nice speech, and he of course said much more eloquently what I said in my book, but he made two very important points. And I'm sure all of you by this time have heard about the warm reception his speech got in Davos. I was there, and you know, the room was crowded, but not as crowded as for the Trump speech. For the Trump speech, I and many others lined up for an hour just to get into the hall. I couldn't take it, take the rambling for more than 45 minutes, and I left.
But Carney's speech was really well received because he made two very important points which are essentially the themes of my book. One is that instability is the norm, and second, the middle powers need to get their act together. And he provided a very pragmatic approach. He said, you know, we middle powers—that is, everybody else other than the US and China—I'm not going to agree on everything, but we should not prevent this from allowing us to come together. There are issues on which we will agree. Let's move forward on those.
In my book, actually, I have a discussion of issue-based alliances, and India at one point was playing this game very effectively. Now, India is a large enough country. When Russia invaded Ukraine and sanctions were placed on Russia, India's response was not to participate in those sanctions because it had a very important economic imperative: cheap and plentiful oil, because India still imports a lot of oil, was very important for India. And I'm hugely oversimplifying here, but essentially India did not want to shift into this alliance that was imposing sanctions on Russia. So it sort of aligned itself with Russia and China.
But India, on the other hand, sees its fundamental values as a democracy much more aligned with the United States. So India has effectively started using this issue-based alliance approach, and this worked very well for a while. And it looked like, with the bromance between Modi and Trump flowering, that India was going to continue deploying this strategy very effectively, until the bromance suddenly broke apart. And now it sort of seems to be back on again.
Issue-based alliances are very pragmatic, but to my mind there is a risk, and that risk is that these alliances are very transactional. They are not based on any fundamental shared values or a deep sense of trust. So if you think about India, you know, it's teetering from one side to another based on the issue at hand, and most of the emerging market economies in the middle and all the other middle powers are in a very similar position.
The other interesting element at Davos was that while, you know, Trump was pushing the rest of the world away, China was opening its arms to the world in an embrace, saying, we are the defenders of multilateralism, the rules-based world order, of globalization and free trade, come to us. And unfortunately, this message was falling a bit flat because there isn't that much trust in China right now given its institutional framework.
So a lot of countries are stuck in the middle. They recognize that China is a very important economic power that they need to maintain a strong economic and financial relationship with, and that could be to their benefit. But at the same time, they're a little concerned. So they're stuck between these two very unsavory alternatives because the US is now seen as a very untrustworthy and unreliable ally. So what do you do? You sort of go back and forth. So the middle powers, I think, have the potential to coalesce and act as a stabilizing force, but now in fact they're acting as a destabilizing force.
We've talked about globalization, the rules of the game, middle powers, and then there is one element which again, in the cheerful version of the book, I had thought would be the answer to a lot of our issues. Now, we just got some new electronic equipment at our home, and I cannot get this, you know, multi-function remote to work, but I'm still a believer in technology. I think technology will really be the solution to a lot of our problems because it expands resources, and we can see that technology is having benefits in our own lives.
I'm sure all of us in this room are using AI to some extent or the other. I mean, yes, at the beginning we just waste some time doing clever things, but then it actually does help a little bit in terms of productivity. It expands the envelope of resources, and in my book I talk about three technologies in particular: AI, digital currencies, and social media. And all of these have potentially very transformative positive effects. Social media does create stronger connections in principle. Digital currencies can play a very important role in leveling the playing field between small economies and larger economies.
And you don't even need to think about, you know, funky cryptocurrencies. Very basic elements like digital payments that you can conduct using a mobile phone have transformed lives in low-income and middle-income countries. You know, in China, in India, electronic payments have become the norm. And in countries where trust is even more at a premium, countries like Somalia, Kenya, and so on, digital payments have transformed the lives of households, of small businesses, street vendors, because they not only provide access to digital payments but to basic banking products and services for managing savings, credit risk.
And when people feel connected to the financial system, they feel they have a vested interest in the economy growing through reform. So I think it makes reforms much easier as well. So this is all very good. However, there is a problem, and that problem, which we can see play out before our eyes, is that all of these technologies also have the potential to concentrate economic and financial power even more greatly between countries and also within countries.
If you look at how AI is influencing our lives right now, there is an enormous amount of concentration both in the corporate world in terms of which firms are managing the AI transformation, but also in terms of what effects it might have on society, with a lot of people potentially not gaining as much as they lose out. In many emerging market countries and especially developing countries, there is a fear that the more interesting kinds of cryptocurrencies, stablecoins that get their stable value from being backed up by stores of fiat currencies like the dollar, might in fact start getting much more traction in international payments.
And that's very good. International payments right now are a pain in the neck. They are very costly. They are slow. They are difficult to track in real time. Stablecoins show how technology can get us around all of those problems. The concern is that if you are a country that is small or a country that has a central bank that is not credible, a currency that is not credible, it's very easy to see your currency essentially being displaced by dollar-backed stablecoins. So essentially, we could end up in a world where even some currencies start disappearing.
And of course, we all know how this combination of AI and social media can be socially very destructive, not just to the social fabric but also infect the political system. So here again, there is one force that I think could have played a very positive role, but I worry that the dark elements of technology might come to dominate and reinforce the dynamics of the doom loop.
I told you I wanted to write a cheerful book, and you know, throughout the entire process of writing this book, my heart was pulling me in one direction, my head was pulling me in the completely different direction, but it didn't want to let go of the original thesis. So I again started thinking a little bit about history, and I could go very far back in history, but let me just again stick with this period since 1990.
If you think about the period when the Soviet Union collapsed and you had the US becoming the dominant power, there was a period when it looked like Japan might be a serious rival to the United States. And then Japan started fading away in the 2000s. It looked like the Eurozone might start becoming a rival to the United States, and then it started fading away. So maybe this is just another phase.
There is one very important difference, though. If you think about the US, Japan, Europe, it was an economic rivalry in terms of the basic visions of the world—how you organize an economic, political, social, legal system. All of these countries had fundamentally the same vision. Now we have a superpower that has a completely different vision of the world. And that's why I think this is not going to be a competition there where we can sort of meet in the middle, because these are very, very different visions.
If you go back in history and think about periods of superpower competition, very often it was often about territory as well. So, you know, yes, Trump talks about, you know, wanting to take over Greenland, Iceland, who knows what he wants today. You know, China does want to have a greater presence in certain parts of Asia, but these two countries are not, you know, directly competing over territory, although, you know, the moon and Mars might be where they have more direct competition, but at least on the terrestrial plane, you know, here there is no direct competition.
But I think this competition of the vision of the world is much more fundamental and much more important. And why is it important? It's not just a matter of bragging rights. If you will note the countries that I spoke about earlier, the countries of the West, broadly defined, all share the same set of values and they tend to stick together on a majority of issues. If you think about more authoritarian kind of regimes which profess to be democratic but are not really democratic, they tend to stick together a lot more, and that has very important implications in terms of economics, geopolitics, and influence.
So I think this is what the real competition is about. And as we think about the different elements of the doom loop, it's hard to see how it's going to square up into a world where we reach a point where the two superpowers essentially help us maintain stability. And in fact, at this book workshop that I alluded to earlier where Aditi was present, the notion that competition breeds stability, which to an economist is instinctive, apparently is not something that political scientists or people in international relations buy into.
There is a sense that one hegemon, so long as that hegemon is benevolent and takes its duties seriously, can actually lead to much more stability. Because right now we don't have, in my view, either of these potential hegemons looking very benevolent. So I think we are stuck in the doom loop.
I have to leave my readers with some light at the end of the tunnel. And the question is, what could potentially get us out of the doom loop? And again, in the cheerful version of the book, I had a very clear answer, and I think that is still the answer. And the answer lies in institutions. There's been some very good academic work done by people in my field and other fields pointing out the importance of institutions. And I view these very broadly.
If you think about domestic institutions, it includes a system of checks and balances, a free and fearless press that is willing to hold public officials to account, the rule of law where even the government, once it promulgates laws, is bound to obey those laws. So the government does not sit above the law, and other institutions like an independent central bank. You also need good international institutions that are seen as legitimate, fair, accountable, and credible. And I think this is where the real task lies.
And the paradox, though, is that we are in a world right now where a lot of people who are in power because of the doom loop dynamics are precisely the people who are shredding those institutions, and they have the task of rebuilding those institutions, which of course they have no incentive to do. So what I think it'll take for us to get out of the doom loop—and I think we're going to be stuck in this for some time to come because of the aspect that each of these elements, economics, domestic politics, and geopolitics, is sort of bringing out the worst in each other right now—is that we need to get more engaged as citizens, not just of our countries but of our communities, and recognizing that, you know, it's really only shared prosperity that will get us moving together.
We need community leaders, business leaders who don't, you know, put their heads in the sand and hope this will all blow over, but will actually get more engaged and use their platforms effectively, and national leaders who will not quite play into this politics of resentment. And, you know, the dynamics of the doom loop make it very easy for these politicians to play into this aspect of vilifying the other. And the other can be defined in any way that suits the moment. The other could be domestic, political and economic elites. It could be China. It could be immigrants. And that becomes a very potent weapon in the hands of skillful politicians, as we have seen.
So to get us beyond this politics of resentment and fear, we need better leaders, and ultimately we have to...
recognize that they are accountable to us. So I don't mean to blame all of us, but it's really the sort of leaders that we demand that will rise to the occasion. And finally, we need better institutions. And it has to be this combination of grassroots movements but also good leaders who will take us to this place. So is there a prospect that we will escape the doom loop very soon? I've given you the answer, but the prospects of us getting to that answer, I think, are not imminent. But ultimately, I would argue it's really in our hands. Thank you.
