The Doom Loop. Written by Ishwar Prasad. basic initiatives; 368 pages; $32. Hearst; 22 pounds
Investors have sent gold, their traditional hedge against the pandemic, on a roller-coaster rideInvestors have sent gold, their traditional hedge against parademonium, on a roller-coaster ride. Officials in European capitals are mulling how to fight a trade war with America. Further east, actual war rages between Russia and Ukraine. Multilateral institutions such as the United Nations and the World Trade Organization, which exist to prevent such conflicts, appear powerless. Even the paragons of international integration seem to have given it up. “We are at a crossroads,” said Canadian Prime Minister and globalist Mark Carney at the recent annual Jamboree on Globalism in Davos.
It’s a good moment, then, to step back and ask why things fall apart. In “The Doom Loop,” Cornell University economics professor Eshwar Prasad offers a poignant answer. His book contends that shifts in the balance of power between countries—the rise of China and India, the decline of Western hegemony—have transformed the global economy into an engine of chaos. Once, this realignment may offer “opportunities for greater stability,” countries choose to “position their power in constructive ways for fear of losing influence.” But instead “the feedback loop between economics, domestic politics and geopolitics is spiraling out of control and becoming destructive on every front.”
The idea that a shift in the balance of power can cause problems is hardly new. In the fifth century BC, Thucydides, a Greek historian, wrote that the Peloponnesian War was made “inevitable” by “the rise of Athens and the fear it had created in Sparta”. In a widely read essay (published in 2015) and book (2017), Graham Allison of Harvard University considers whether this “Thucydides Trap” could trigger a war between America and China. He identifies 16 instances in the past half millennium where a rising power came to challenge rulers, noting that 12 ended in war.
Mr. Prasad’s book is interesting because he takes things a few steps further. As well as the growing forces fueling the disorder, he considers the world’s economic and political systems exacerbating this effect and sets out in some detail how. The argument is even more interesting coming from an author who is an authority on financial globalization and former head of the International Monetary Fund’s China Department. Like Mr. Carney, he belongs to the clan that once encouraged international solidarity for peace and prosperity. Now he thinks the system has changed.
Take cross-border flows of trade and capital, which globalization has transformed from a mushroom to a flood. In theory, these should improve relations between rival powers. American companies investing in China, after all, don’t want their returns hampered by diplomatic conflict, so will lobby their governments accordingly. In reality, as politicians wound them, American companies retreated from China, and trade and capital flows began to realign along geopolitical lines.
This not only blunts the incentives of business leaders to promote cordial international relations. If they benefit from government subsidies to build at home rather than abroad, or from tariffs protecting them from foreign competition, they have a new incentive: to encourage conflict that may prompt more subsidies and tariffs.
The book outlines several other “doom loops” lurking in various parts of the global economy. The race to replace the dollar as the global reserve currency (or at least reduce its power) has led to an “increasingly fragmented second tier” of alternatives such as the euro, yen and yuan, Mr Prasad argues. The erosion of norms, and the effectiveness of multilateral institutions that are supposed to enforce them, could be exacerbated by young rival institutions led by China. Choices for middle powers caught between the US and China, such as India and Indonesia, “vary only in their degree of obscurity”. The transactional behavior it encourages is hardly conducive to stable alliances.
Underlying all this is a curious argument for an economist to make: that competition, generally thought to promote far better outcomes than unchecked monopolies in industries like technology and health care, promotes chaos when applied to geopolitics. Warlords have known this since the time of Thucydides. What is troubling today is that, as Mr. Prasad writes, the idea that sharing power among the many is beneficial is “the math of the West. Active force behind ministerial principles”.
Understandably, therefore, the weakness of the book is that the talk of doom creates too much gloom. In other words, “The Doom Loop” is a thoroughly depressing read. Towards the end, Mr. Prasad tries some suggestions for how to break the doom loops. These are mostly far-fetched and rosy ideas, including the US and China ceasing trade distortions, governments trusting each other more, and the IMF treating strong countries as harshly as weak ones.
The author is right that a world would be more stable where institutions rebuilt their credibility and governments were honest with citizens about the trade-offs their policies included. But how realistic is that to you?
