Speaking from World Economic Forum 2026 in Davos, Eswar Prasad, Professor of Economics at Cornell University and former head of the IMF’s China division, offered a stark assessment of the world economy.
Drawing from his new book The Doom Loop, Prasad said the global system is entering a phase of deep instability, marked by the breakdown of long-standing political, economic and geopolitical arrangements that once provided balance and predictability.
According to Prasad, this is not a routine economic slowdown or a temporary disruption. Instead, the world is witnessing a structural shift, where globalisation is no longer seen as a win-win force and institutions that once acted as stabilisers are steadily losing credibility. As domestic politics, economics and geopolitics begin to reinforce each other in negative ways, the risks of fragmentation and conflict are rising sharply, with no clear corrective mechanisms in sight.
From trade realignments and rising protectionism to the disruptive role of technology and artificial intelligence, Prasad warned that countries across the spectrum—advanced and emerging alike—are being pulled into this “doom loop.”
Prasad outlined how these forces could reshape the global economic order over the coming decades, while also pointing to the difficult but necessary steps needed to rebuild trust, institutions and shared prosperity.
This is the edited excerpt of the interview.
Q: The Doom Loop that is your new book. How appropriate a title is that? What do you make of the many developments that have shaped 2025 and what that tells us about what the world is going to look like in 2026?
A: What we are seeing here in Davos is a moment when there seems to be a crumbling of the traditional world order as we knew it, where there was a well-defined alliance of the Western countries, the liberal, market-oriented democracies, it was seen as standing in counterpoint to China and other socialist economies. But what we are seeing is a fragmentation of the world order driven by a variety of forces that I think are feeding off each other in a negative way. In The Doom Loop, I talk about the interaction between domestic politics, economics and geopolitics, and all of these could work together in a very positive way.
If you think about globalisation, for instance, it was supposed to make people in all countries and generally the entire world much more prosperous, and thereby bring countries together. And the idea was that globalisation, because it would be a positive-sum game that where everybody could benefit from trade, for instance, would be a counter balance to the zero-sum game of geopolitics, where one country can gain influence only if another country loses influence.
But what has happened right now is that even globalisation has seen as a zero-sum game, or even a negative sum game, where one country gains, other country has to lose, and that means that this balancing force is gone. The zero-sum game of geopolitics now becomes much more dangerous because there are no offsetting forces. The concept of the doom loop now is that these forces are feeding off each other in a way that generates instability rather than stability. And I think what we are seeing here in Davos is a prime example of that, with Donald Trump likely to make a speech that suggests a splintering of the Western alliance. It creates a lot of fragmentation in the world in all of these dimensions, political, economic and geopolitical.
Q: On the back of what you have just said, the many changes that you have spoken of and alluded to, we are now talking about structural changes. This is not a cyclical downturn, what you suggest is a structural change that could have implications and an impact over the next few decades.
A: That’s right, if you think about the way civilization has progressed, there have been times when there has been a shift in one direction and then a correction. Even the United States has gone through these periodic corrections where it lurches to one extreme and then lurches to another extreme. But what is very important is there was a self-correcting mechanism in place. The same was true on the global stage as well. But going back to the US, if you think about what created the self-correcting mechanisms, it was really the institutions such as the democratic process, the rule of law, the free press, and all of those institutions are really being whittled away right now, if not really being destroyed.
The same is true at the international level, the institutions that were seen as maintaining the rules of the game are now being seen as less legitimate. They’re being seen as less legitimate by the advanced economies which set them up, but also by the emerging market countries, China, India and others that feel that those institutions are not serving those interests well. We are seeing a breaking apart of the rules of the game. I think it’s going to be much harder to put these things back together and for the corrective mechanisms to work. The way you phrase the question is exactly right, that we are not in the middle of a cyclical change. I think something more fundamental in terms of reshaping the world economic order is in progress.
Q: How do you believe this reshaping is going to take place? What will this reshaping lead us to? At this point in time what we are seeing are tactical changes, for instance, with the US taking the position that it’s taken, you have suddenly seen Europe rediscover or reset, or attempt to reset, its ties with China. As you look at this reshaping of the economic order what do you see more blocks emerging, do you see more bilateral relations emerging? How is this likely to play out?
A: One possibility, which we saw in the last few years already is more fragmentation. If you think about global trade, the benefits are so large, that I don’t think they are going to retreat from global trade, but certainly, rather than trading with all the countries of the world, we see trade falling along geopolitical lines that is, countries that are geopolitical allies build stronger trade and financial relationships with each other. Now that means that you’re denying countries the benefits of much freer, much broader trade. But countries feel that this is one way for them to reduce exposure to geopolitical and other risks.
But there is a problem with this fragmentation. It might serve countries well in the short run, but now you have geopolitical and economic lines falling along the same ways, and economics or trade, which used to be a bridge between geopolitical divides is gone, so it means even more instability, and that is very worrying. But overall, we are not going to see trade disappear. Now, regional blocs are certainly going to form, because, again, countries are trying to figure out how best to generate the benefits of trade. But we are also in a very particular moment right now, which I think is worth considering. Certainly, there are two great powers right now, the US and China, that are sort of well matched, militarily, economically, financially and so on. It would be a compelling proposition when the US is trying to impose tariffs on practically every other country for the rest of the world to say, let us reduce our trade with the US., let us trade more with each other. But there is a problem.
The second largest economy in the world, China is now facing significant domestic problems, and the way they are generating growth is through exports, and when the second largest economy in the world is not pulling the world along, but it’s, in fact, counting on the rest of the world to absorb its exports that creates a problem. For all the countries stuck in the middle, it’s countries like India, but also even the advanced economies, like Japan, Germany, the United Kingdom, all of these countries are not doing very well economically. They need exports, and they are terrified about being swamped by cheap Chinese goods landing on their shores. They are really caught in the middle so the notion of the US being isolated, which should be in normal times, a logical proposition, is unlikely to play out.
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Q: Here in Davos, while there’s a lot of conversation around trade and tariffs, there’s also the hope around AI and what it’s likely to do as far as global growth in the global economy is concerned, how does that trigger in the new order, in The Doom Loop?
A: That’s a very important element of the book. In fact, I should tell you that when I started the book, I wanted to tell a much more positive story about how we might be going from one equilibrium, which was largely unipolar after the fall of the Soviet Union, to a multi polar or bipolar world. And as an economist, one thinks that a world where economic power is more evenly distributed, should be one that has more balance, efficiency, stability and so on. And technology was one of the forces that I thought would lead to this new equilibrium, because it generates more prosperity.
In thinking about this force so I came to a very different conclusion. I talk in particular in the book about three specific technologies, AI, digital currency, social media, all of these could generate positive gains, but in fact, what we are seeing is that they are leading to a much greater concentration of economic and financial power within countries, but also across countries. And moreover, if you think about small disruptive nations like North Korea, for instance, or even larger ones, like Russia, they can use these tools very effectively to foment a lot of instability around the world. So, while technology is certainly generating a lot of gains in terms of productivity, output and so on, I think under the surface, it’s generating even more instability within and between countries.
Q: Since we are talking about technology, and the implications of what this technology could lead us to in terms of productivity gains, what it’s also seeing companies do in the short term is spend significant amounts of money in the infrastructure build out, which has been the tailwind for growth, specifically for markets like the US. How do you see that playing out in the short term and the impact of this massive infrastructure build out that we are seeing today?
A: Now, certainly, AI is going to have a very big impact across the board and there have been many conversations have already participated in Davos about how companies are, in fact, undertaking very significant investments in AI. But two interesting things have come out of the discussion so far, if one thinks about the bottom line, the bottom line impact seems to be much more muted than one might have expected, given how transformative we all think this technology is going to be. And the second problem, of course, is what the implications are for employment.
When we think about advanced countries, there was an entrepreneur from India who was talking about similar issues, about how they were going to set up a new plant which would have far fewer workers, which would produce the same amount of output using AI and other technological innovations.
So technological innovations are certainly very good in terms of productivity, in terms of output growth; in terms of employment growth, which is a challenge not just in India but around the world that is going to be a serious issue. There have also been some discussions with leaders from African countries, many African countries right now are growing quite well, but even in those countries, employment growth is really lagging, and that is a significant problem, because, again, going back to the concepts of the doom loop, you can do well on the economic front, but if you don’t generate employment growth, you don’t generate household income growth, then you end up with a very negative feedback loop with domestic politics affecting economics as well.
Q: Where do we find hope, is there any hope in The Doom Loop at all?
A: I had to leave my readers with some hope so I do talk in the end about how difficult it is going to be to get out of the doom loop. It’s not going to be easy, because, as we just discussed, these are structural forces that are playing out. But ultimately, it’s going to take a combination of three things, very engaged citizens, where we think not just about a short term narrow national interest, but think about how shared prosperity is the answer. Leaders, community leaders, business leaders, national leaders, who can help us see beyond the short-term prejudices. And then we need rebuilding of institutions, national institutions, including the rule of law, the independence of the press and so on, but also international institutions.
One way to think about this is that all these institutions are crumbling, but it’s also an opportunity to rebuild institutions, or perhaps build new institutions that are much more effective, much more legitimate. None of this is going to be easy, but I think understanding the forces that got us here, which is what the doom loop is about, I think it’s very important as a first step.
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