Economist Eswar Prasad warns ‘supergroup’ of central powers cannot stop ‘doom loop’ threatening world economy | Fortune

But the middle powers are a “motley bunch,” says Eswar Prasad, the Tolani professor of commerce at Cornell University, including everyone outside the US and China. “They are big and small, rich and poor, so they will not have enough needs.”

Carney once called it “variable geometry,” or getting governments to build coalitions in ways that suit other interests. But Prasad warns that such alliances “are not based on any shared values ​​or deep trust.”

This will make Carney’s “variable geometry” not a bad substitute for the global network of international organizations that have helped underpin the rules of international diplomacy and trade. “If you don’t have deep alliances based on mutual trust, it’s hard to create a new policy based on that,” says Prasad. “The gap between rich countries and poor countries will rise.”

The Doom Loop

International cooperation as a political program appeared weak since the American President, Mr. Donald Trump, first won the White House in 2016. Since then, Washington has continued to “de-risk” from China through tariffs, export controls, investment inspections and other measures, while increasingly wanting to avoid many forums and act unilaterally.

Prasad, who is also the author of The Doom Loop: Why the World Economic Order Is Going Into Instability, it says that forces that were supposed to stabilize the world—globalization, international organizations, emerging economies—are making things worse.

In an interview with luck, Prasad said he started the book wanting to make a case with the hope that the shift of economic power to emerging markets would bring order and stability. Instead, he concluded that the current state of globalization is “creating instability rather than stability.”

Voters now see globalization as a zero-sum game, with benefits accruing to political and economic elites who “tilt the system too much in their favor.” That discontent will feed into domestic politics, creating anti-globalization policies such as tariffs; which, in turn, feeds back into the global system, increasing instability.

The trade continues to increase, reaching a record value of 35 million dollars last year. But most of this trade takes place within geopolitical blocs rather than beyond them. “Trade and financial flows are fragmenting in a way that deepens these gaps.” Prasad says.

Consulting firm McKinsey found that “geopolitical distance” in trade and investment is shrinking, as countries are increasing trade and investment in partners with ties to their security alliances.

China and India

Prasad does not see much reason for optimism in Asia.

In February, the International Monetary Fund estimated that China’s economy will grow by 4.5% this year, warning that financial and industrial pressures “have led to lower productivity, a lack of capital, and a higher rate of expansion in some trading sectors.” China’s retail sales growth slowed to 0.9% in December, the slowest since the end of 2022, while fixed-asset investment fell by 3.8% in 2025, the worst performance on record.

In its latest review, the IMF has again urged Beijing to switch to a policy-led growth model. Chinese policymakers have also tried to encourage domestic spending, but progress has been very slow.

China has made progress on its economic recovery before the CCID epidemic, Prasad says, with consumption contributing more to GDP growth than investment. But the pandemic has pushed Beijing back to its “old debt-driven, investment-driven book,” he argues, compounded by policy collapses in technology, education, and health — health that has undermined confidence in the private sector.

“The government has tried recently to show that the private sector is back, but I don’t think private firms are confident about this change,” Prasad adds.

India’s neighbor also seemed poised to take advantage of the US “friendship,” due to its close ties with Washington. But apart from some high-profile moves from companies like Apple, India remains behind smaller emerging markets like Vietnam.

“It seemed the stars were aligned for India,” says Prasad. “But it looks like this chance will be smaller than expected.”

Prasad believes that India will struggle to build a relationship with China, even if the country’s government wants to diversify its relationship. India cannot fully open its markets to China, as its manufacturing sector “will collapse under the weight of imports, which India cannot compete with.” Now, in the face of global governance, India fears that any devolution of powers to institutions like the IMF will give China more power – “and in a way, India will lose out.”

Businesses may be making things worse

What, then, can international businesses do in this very difficult country?

Prasad argues the era of “lean, lean, hyper-efficient supply chains is over.” Now, company leaders talk “all about sustainability”, be it diversifying suppliers, deepening relations with politically friendly countries, and returning to domestic markets. The economist admits that his advice to CEOs is “always unsatisfying”: Don’t take on too much debt, save money, and build buffers.

Yet the natural response of businesses may be to make things worse. One of the strongest opponents of US-China decoupling was the business community, which relied on China as a producer and a major consumer market. “That helped stabilize the relationship between the two countries,” Prasad says. Now that companies are pulling back from China and other politically troubled economies, they may be “inexplicably increasing” the risks they’re trying to avoid.

“I’m afraid we’re going to continue on the path of doom until we get to the point of serious reform,” Prasad warns, “and it could be very bad.”